Guest: Mark Luschini, Janney Montgomery Scott, Chief Investment Strategist $81 billion AUM
Topic: Market Monitor
Trapped by Tariffs on Trade
The tariffs continue to throw some gravel on the road and we’re left wondering what retaliatory event could be triggered.
It would seem that the retaliatory tit-for-tat trade war circles back around to the US, leading to more goods and imports being targeted. Plus, this heightens geopolitical risk with other trade partners beyond China.
We anticipated market volatility would pick up in 2018, driven by economic indicators peaking, higher stock valuations, and further interest rate increases.
However, major market downturns are typically associated with recessions and earnings contractions – neither of which we see in the foreseeable future.
While there are signs that the rate of economic growth may be peaking outside of the U.S., economic growth remains at a high level, which we think is sustainable.
Meanwhile, profit growth is forecast to come in around 20% in 2018, while stock valuations are now more favorable due to the recent correction. We continue to favor stocks over bonds.
We are maintaining our overweight stance on stocks as we remain confident in the economic outlook. Ø Major bear markets are typically associated with recessions and contractions in earnings. We do not expect either in the foreseeable future. Ø Every post-war U.S. recession was preceded by an inverted yield. Although the 2/10-year Treasury curve has flattened, it has not inverted yet.
Despite the modest pullbacks this month, consumer confidence remains consistent with above-trend economic growth. Given the multiple snowstorms in the Northeast in March, housing volatility is likely to continue.
The personal consumption expenditure price index rose 1.8% y/y, which is still below the Fed’s 2.0% target.
This suggests the Fed will remain on its current gradual path of interest rate increases.
We expect solid economic growth to continue this year, boosted by tax reform and increased government spending.
The themes being good economy and higher rates, defense spending is going up and biz spending on technology is riding
Spider S&P Capital Market (KCE) – an ETF that hosts asset managers and custody banks primarily. The theme is asset managers are finding new ways to attract assets via active management or passive ETFs. And the custody banks stand to benefit from interest margins.
S&P Aerospace & Defense (XAR) – Aerospace and Defense ETF that is evenly weighted. So, Boeing doesn’t dominate as a top holding, and it stands to benefit from defense spending as military spending can help economies. This won’t shrink anytime soon by looking at the headlines.