EC Making Sense Of This Market

The market is juggling a number of balls, ranging from the seemingly never-ending trade/tariffs issue to worries about global growth and Fed policy. Treasury bond yields have become an excellent proxy for watching the interplay of all these worries in real time. And the relationship has been fairly straightforward, with the major stock market indexes going down as the yield on the 10-year Treasury bond goes down.

Treasury bond yields have long been a very good proxy for economic growth and inflation outlook, with down-trending yields typically indicative of the market’s weak growth and inflation outlook. But the current/ongoing downtrend in yields has more to do with Treasury bonds’ well-earned reputation for safety.

These instruments are not only risk free (from a credit risk standpoint), but also extremely liquid that makes it easy to get in and out. Investors, both local as well as foreign, flocking to Treasury bonds as a safety play in the current uncertain environment when the day-to-day market movement is driven less by fundamentals and more by something as hard-to-handicap as a Presidential tweet.

I have long been sanguine about the outlook for the U.S. economy and the eventual resolution of the trade issue. The way to deal with this situation is to tune out the noise and stay focused on long-term fundamentals of profitability, valuation and diversification, using every instance of panicky market selling to pick up quality stocks that are on your watch list. Timing the market is never easy and this has become almost impossible to do in the current topsy-turvy environment.

Trade & Earnings

There is little doubt that tariffs are bad for earnings. There is not only the direct relationship of higher tariffs weighing on margins, but also an indirect effect through reduced corporate confidence weighing on spending and investments.

Companies exposed to international trade have been making this point at every available opportunity this earnings season, from CSX Corp. (CSX) and Caterpillar (CAT) to even the big banks like JPMorgan (JPM) and others partly blaming the trade uncertainty for tepid growth in loan portfolios. We will likely hear more about the trade issue from companies reporting this week, ranging from Macy’s (M) and Wal-Mart (WMT) to Deere & Co. (DE) and chipmakers Nvidia (NVDA) and Applied Materials (AMAT).

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Comments

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Moon Kil Woong 4 days ago Contributor's comment

A lot of this weakness is due to a tax that is triple bad news. Tariffs slow the economy while creating inflation. So far we aren't having much inflation but it may be a matter of time if they keep increasing. The third bad thing about tariffs is they destroy our markets as well as those who they are targeted at. There are other side effects but these are the most obvious and are horrible in and of themselves.

Alexis Renault 4 days ago Member's comment

So if tariffs are so bad, why is the current administration so keen on adding them?