For a second straight week, stocks rose in the face of trade war escalation. In the week after enacting tariffs on $34 billion of Chinese goods, President Trump announced his intention to apply duties to an additional $200 billion, although at a lower 10% rate. China’s lack of forceful response to this newer threat, and deepening investor understanding that tariffs will be just one factor impacting global growth provided some comfort. Earnings season moved into full swing with several major financial companies announcing mixed results. Perhaps due to reduced trade concerns, small caps lagged, but still remain ahead of large caps for the year. Bonds changed very little.

Weekly Returns

S&P 500: 2,801 (+1.5%)
FTSE All-World ex-US (VEU): (+0.6%)
US 10 Year Treasury Yield: 2.83% (+0.01%)
Gold: $1,241 (-1.1%)
EUR/USD: $1.168 (-0.5%)

Major Events

• Monday – China’s Cosco shipping received US approval to acquire rival Orient Overseas for around $6.3 billion.
• Tuesday – The Trump administration released a list of goods from China totaling around $200 billion that could be subject to 10% tariffs, subject to review. 
• Tuesday – President Trump ruffled feathers at a NATO gathering, and pressured allies to increase defense spending.
• Tuesday – EU anti-trust officials were reported to be planning a multi-billion fine against Google for its use of the Android operating system on mobile phones.
• Wednesday – Oil prices fell nearly 5% on reports that Libya would resume shipping after its ports were regained from an armed faction.
• Friday – US special counsel Mueller indicted 12 Russian military intelligence officers related to tampering in the 2016 election.
• Friday – President Trump issued kind words toward UK Prime Minister Theresa May and the two leaders vowed to complete a trade deal as soon as the UK exits the EU.
• Friday – The Trump administration was said to be considering tapping the strategic energy reserves to ease prices at gas pumps.
• Friday – Loan growth at JPMorgan Chase and Citigroup helped boost double digit earnings while Wells Fargo disappointed. Shares of all three were down modestly for the day.

Our Take

It is probably not coincidence that President Trump is said to be considering tapping strategic petroleum reserves just months before mid-term elections. Americans love their cars and trucks, but hate paying high gas prices.

With all the trade war talk, mid-term elections haven’t seen as much media attention as they might otherwise, but that will likely start to change in the coming months. For whatever reason, investors always seem to view mid-terms as scary. There is some logic to this, as markets generally dislike most forms of uncertainty.

The president’s party typically loses seats in mid-terms and that is expected to be the case this year, with most projections suggesting the Democrats could regain control of the House. If so, that should temper legislative activity and potentially reduce longer-term market uncertainty. Divided government is not a bad thing for markets. Having said all that, elections are difficult to predict and recent years have cast greater doubt on polling data and so-called election experts.

As we saw with Brexit and the US presidential election, even if you could correctly predict the outcome, it is very difficult to predict market reaction. The mid-terms will be interesting, but we don’t think they should be a major driver for investors.