U.S. stocks have held up fairly well over the past week even as U.S.-China trade tensions have flared up. The S&P 500 Index is less than 3% below its record high on April 30.
U.S. stocks’ resilience has been especially encouraging amid more signs of slowing global growth. Global manufacturing surveys for April indicated that the year-long slowdown in global manufacturing activity continued. Global leading economic indicators from the Organisation for Economic Co-operation and Development (OECD) pointed to more weakness ahead, particularly in Europe, Japan, and the United Kingdom, but also for the United States.
We have seen some evidence of stability in European data lately, but global purchasing managers index (PMI) and leading indicators show better growth earlier this year may prove temporary. Significant political challenges in the United Kingdom, Italy, and France also linger on the horizon.
The OECD assessment actually improved for China, reflecting stimulus put in place. But the latest round of Chinese economic data (including retail sales, factory output, capital investment, and foreign direct investment in China) pointed to further slowing of the Chinese economy.
Signs of weakness in China could bode well for trade talks and help bring the Chinese to the bargaining table.
“Downside risk to global growth has increased due to escalating U.S.-China trade tensions and further weakness in Europe,” said LPL Chief Investment Strategist John Lynch. “The latest batch of global leading indicator data painted a more favorable picture of emerging markets overall, but less favorable for Europe.”
Positive trade developments with other regions have helped buoy U.S. stocks over the past couple of days. The United States is delaying a decision on European and Japanese auto tariffs by as much as six months. U.S. trade officials are also reportedly making progress toward a resolution on steel and aluminum tariffs with Mexico and Canada.
However, China remains the big fish. We believe the Trump administration is very serious about not settling for just any deal. We expect an agreement eventually, but resolution may not come until well into the summer, and more market volatility in the interim is likely. Stay tuned.
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