In our 11 years in the business, we have never more uncertain about the market although our macro research
suggests the long term outlook for the economy to remain healthy still there are some valid reasons for caution remain. Within seven days (from July 30 to August 5) we have seen the S&P 500 dropping 6% and the ten-year yield falling to 1.62%. At the moment of writing this report, major U.S. indices ( S&P 500 and NASDAQ 100) are dropping below 3%.
Although there are a number of factors for equities investors to worry(These factors are also behind the spectacular rally we have witnessed in P.M.s and cryptocurrency market) but despite all of them, we believe U.S.-China trade tensions is the most concerning in all of them. The most recent U.S. escalation of trade and currency-related tensions with China could have a more lasting impact on global markets.
Let’s talk about how the latest round in trade tensions could have a more devastating effect on your equities portfolio and may benefit physical and digital gold along the way.
Corporate confidence and U.S. growth:we have already informed you that the trade war has influenced the Chinese economy the most opposed to united states, but we do understand that trade wars have always shown to be detrimental for the countries involving in it and the U.S. can’t be an exclusion.we have observed how prior U.S. tariffs affected the stock market which caused the drop in investors risk appetite and boosted safe-haven buying but still Prior U.S. tariffs had limited economic impact due to balancing currency moves and companies’ ability to fill gaps in their supply chains from other countries. This time, however, similar adjustments may not work. That could mean consumers will need to pay higher prices for the things they thus far have been spared, which includes auto, electronics, and tech sectors. That would lower the margin for the cooperation which may contract the PMI numbers(corporate confidence)
Yuan devaluation:In response to new tariffs of 10% on $300 billion worth of Chinese imports imposed by the Trump administration, set to go into effect September 1, 2019, China devalued its currency and By devaluating its currency, the Asian giant lowered the price of its exports and gained a competitive advantage in the international markets. Some believed that China’s devaluation of the yuan was just the beginning of a currency war that could lead to increasing trade tensions, This will have a severe effect,
Cheap money: Market expects more rate cuts from fed due to slower economic growth and falling global interest rates. Quantitative easily helps the economy to stabilize but it always doesn’t work,We need to keep in mind that government could only provide you cheap money by lowering rates or buying bonds in order to stimulate growth but still people have the option whether to use it or not no matter how cheap it is, overall, the Fed could be “pushing on a string,” where lower rates and cheaper credit won’t be enough to boost economic growth.
Summary-It could be possible for the stock prices to rise from the level they are currently trading at for coming months or perhaps years but we think it would be very foolish for us to stay invested in the equities by knowing that the Forward-looking economic indicators are deteriorating, and the inverted yield curve, an important indicator based on bond market dynamics, continues to point to a coming recession.we do understand that even after seeing the longest expansion in the U.S. economy for 121 consecutive months, This market still has some room to expand however the question which one needs to ask here is,Are you willing to risk all in order to gain some?
We had already sold our equity portfolio months ago, and our recommendation is that investors should exit or at least pull sizable profits out of the table(if any) from there portfolio and should turn their attention to the safe-haven assets.