Higher tariffs. Trade negotiations broke down yet again this week, with the U.S. and China failing to find common ground in this week’s talks. The U.S. will increase tariffs on $200 billion in Chinese imports, and officials threatened higher levies on another $325 billion of goods. Talks will reportedly resume today.
The implications. On the surface, higher tariffs on Chinese goods may only have a negligible impact on U.S. economic growth. However, tepid business and consumer spending the past two quarters show the uncertainty of trade tensions can weigh on activity and sentiment. Trade has also roiled financial markets this week. While we think volatility can be opportunistic (given our optimistic outlook on U.S. stocks), a significant pullback in stocks can lead to a decreased sense of financial well-being.
Stocks on track for worst week of 2019. Though the S&P 500 Index is just 3% off its all-time closing high, the index is poised for its worst week since December. While trade tensions are to blame for recent volatility, we think a further pullback could be healthy given strong gains over the past four months. We do not expect a retest of the December lows, and technically, we see near-term support in the 2800 range, followed by the 2600 level. A pullback to 2800 (about 3% lower than current levels) would represent just a 5% pullback from the highs, while 2600 would be approximately 12%, both smaller than the average year’s correction. Going forward, we will be watching sentiment for signs of fear-based selling, and cyclical indicators, such as copper, that broke down prior to previous bouts of equity weakness.
Consumer inflation picks up. Last month’s gain in the headline Consumer Price Index (CPI) was slower than expected, but core price growth (excluding food and energy) remained firm. Core CPI rose 2.1% year over year in April, higher than March’s 2% pace. Consumer inflation has slowed recently, but 2% year-over-year growth in core CPI is just slightly below the gauge’s cycle high. Wage and producer prices have also grown at a healthy pace, and the Federal Reserve’s pause may help fuel higher inflation over the next several months.
The power of compounding interest. Albert Einstein called compounding interest the “eighth wonder of the world”. Today on the LPL Research blog, we’ll show why leveraging time and “interest on interest” can benefit all investors.
- CPI Report (MoM, Apr)
- Monthly Budget Statement (Apr)
- Germany Exports (Mar)
- Germany Imports (Mar)
- UK GDP Report (Preliminary, Q1)
- China Foreign Direct Investment (Apr)
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