Weekly Market Update (June 18 – June 22, 2018)

By Craig Fehr June 22, 2018

The Dow Jones Industrial Average fell by about 2%, the S&P 500 fell by about 1%, and the TSX advanced on the week. China's announcement that it may put additional tariffs on U.S. products drove U.S. shares lower. Meanwhile, Canadian markets stayed out of the trade fray, benefiting from solid gains in oil prices as OPEC reached an agreement on Friday to raise output. That same day, however, Canadian inflation and retail sales data disappointed, creating some uncertainty around the timing of the Bank of Canada's plans to raise interest rates. We expect the focus on interest rates and trade negotiations to drive volatility for the remainder of the year, so investors should prepare by rebalancing their portfolios to the mix of stocks and bonds based on their comfort with risk and long-term financial goals.

U.S. Stocks Weaker as Trade Worries Escalate

While Canadian stocks have held up, U.S. stocks moved lower this week as escalating trade tensions between the U.S. and China continued to fuel fears of a trade war. With China announcing that it could retaliate with tariffs on U.S. exports, the Trump administration countered with an announcement that it is identifying higher tariffs on an additional $200 billion in Chinese imports. This tit-for-tat escalation in trade tensions is raising concerns about how much additional trade disruptions could slow global growth and raise prices of goods in the U.S.  

Worries that a trade spat between the U.S. and China could intensify into a global trade war are a legitimate source of anxiety for the markets, as we think this issue will continue to prompt spurts of volatility as we move forward. That said, we don't think an all-out trade war is the most likely outcome. Here are a few key takeaways:

  • The tariffs aren't immediate nor are they a foregone conclusion. The original $50 billion in announced tariffs, which were then matched by China, don't go into effect until July 6. And if the additional $200 billion in tariffs were to materialize, they would be subject to a review process as well, which could take months. Several actions would need to take place before any of these announcements could be implemented, leaving open the possibility that negotiations can avoid higher tariffs and trade disruptions. Escalating tariff announcements make negotiations more difficult, but we think it's unlikely that all of the proposed tariffs will be enacted. 
  • Inflation could be a byproduct. Over the past few months, the U.S. has announced higher tariffs on imports from Canada as well as Europe, Mexico, China and other countries. Some, but not all, of these tariffs have been implemented, and as a result, U.S. buyers are already paying higher prices and searching for other sources. Other countries have also increased tariffs on U.S. items – including agricultural products, crude oil and vehicles – hurting U.S. exporters. While inflation remains fairly contained, a faster-than-expected rise in consumer prices could prompt the U.S. Federal Reserve to consider deviating from its current path of gradual rate hikes, which would be disruptive for the U.S. stock market. 
  • The numbers are large, but context is important. Keep in mind that $200 billion of exports represents just slightly more than 1% of U.S. GDP and is still a relatively small amount when compared to total world trade. While the fear is that these figures could grow, they don't represent a breakdown in global trade activity. The U.S. imported $505 billion from China in 2017, while China imported $130 billion from the U.S., which is why China will likely consider other measures in addition to tariffs in response. Similarly, NAFTA trade represents a sizable impact to Canada's economy – with the U.S. being by far Canada's largest export destination – but we anticipate the outcome to produce moderate adjustments to the North American trade pact, representing a modest impact to domestic GDP.
  • Fundamentals remain healthy. The impact of higher tariffs will depend on their magnitude, since they raise prices for consumers, disrupt supply chains, reduce exports and possibly present headwinds to U.S. and global growth. But so far, the higher tariffs and ongoing trade rhetoric haven't changed our view that the fundamentals of economic and earnings growth are improving. Unemployment is near a multi-decade low in Canada and the U.S., and wages are beginning to rise at a faster clip. These should support household spending, which makes up the bulk of Canadian and U.S. GDP. U.S. tax cuts, additional government spending and rising prospects of business investment offer additional support against trade challenges. Global growth also remains fairly solid, supporting the case for international diversification. 

Worries about the possible impacts of a trade war with China reflect the importance of trade in the global economy, but they're likely to be temporary. This highlights the importance of remaining invested in an appropriate, well-diversified portfolio based on your risk tolerance, financial goals and time horizon. We expect market volatility to continue, but with ongoing support from healthy economic and earnings growth, pullbacks continue to present compelling buying opportunities, in our view.

The Stock & Bond Market

Index Close Week YTD
TSX 16,450 0.8% 1.5%
S&P 500 Index 2,755 -0.09% 3.0%
MSCI EAFE 1,964 -1.8% -4.2%
10-yr GoC Yield

2.13%

-0.09% 0.08%
Oil ($/bbl) $69.36

6.6%

14.8%
Canadian US $0.75 -0.5% -5.3%
Source: Bloomberg, 06/22/18. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.

The Week Ahead

Next week, we'll get a look at GDP numbers and the health of the U.S. consumer, with data on both released on Friday.

Important Information

The Weekly Market Update is published every Friday.

Edward Jones does not provide access to past weekly summaries.

The S&P/TSX Composite Index and S&P 500 Index are unmanaged indices and cannot be invested into directly.
Diversification does not guarantee a profit or protect against loss
Dividends may be increased, decreased or eliminated at any time without notice.

Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

The value of investments fluctuates and investors can lose some or all of their principal.

The content of this report is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

"Member - Canadian Investor Protection Fund"

Diversification does not guarantee a profit or protect against loss.

Find an Advisor

Find an Advisor

Enter a Province and then enter a last name

    Get a Stock Quote

    Get instant quotes for your favorite companies and mutual funds.

    Your Watch List

    Company or Fund Price Change

    Quotes are delayed at least 15 minutes. Market data provided by Thomson Reuters.

    Edit your watch list

    Personalize your Watch List and track up to 10 stocks and mutual funds.

    Set your watch list