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Tuesday, April 10, 2018


Weekly Market Update
Editor’s note: Yes, Edward Jones is my stockbroker, but in my experience as a business journalist early in my career I recognize fair commentary when I read it.  This weekly analysis (covering April 2 to April 6, 2018) is better researched, written and delivered than most non-business daily newspapers.

By Craig Fehr, Principal, Investment Strategist, Edward Jones--Stock markets churned in a choppy week of trading as the U.S. and China exchanged tit-for-tat tariff announcements that ultimately led the market lower. Beginning on Monday, China announced that it would impose tariffs on U.S. goods worth about $3 billion. This was China's response to the steel and aluminum tariffs President Trump announced in March. The White House answered with proposed tariffs on 1,300 Chinese products worth about $50 billion, but the Chinese government nearly matched it with its own set of proposed tariffs on $50 billion on U.S. exports in the auto, aerospace and agriculture industries. It is important to note that neither country has officially imposed these tariffs yet, and quotes from Chinese officials invite the U.S. to negotiate a trade deal, indicating that the final deal may not include tariffs at all. Trade and policy uncertainties are a headline risk, but the fundamental foundation of economic expansion and rising corporate profits is still very much intact. We view market weakness as a buying opportunity for long-term investors to buy quality investments at lower prices.

Trade, Jobs and Volatility: Last Week's Key Market Takeaways
The stock market's bumpy ride continued last week as concerns over a potential trade war remained front and center, while the most recent look at the jobs market offered some relief that the underlying economy remains on firm footing.
After last year's extended run higher, which came without even a 5% drop along the way, the stock market's recent weakness may feel like a new direction is afoot. We think this is more likely a soft patch, similar to the pullbacks we experienced in 2015 and 2016, when stocks declined an average of 12.9% for an average of 14 weeks. Last week's news and see-saw performance are indicative of what is likely to be the investment narrative as we progress in 2018 – one in which fairly healthy fundamentals are supportive but are likely to be clouded periodically by ongoing policy risks.
Trade fears continue to rise – Worries of an evolving trade war remain in the driver's seat for equity markets right now, adding steam last week amid the verbal volley of retaliatory tariff announcements between the Trump administration and Chinese officials. America's $50 billion tariff proposal was matched by China, eliciting a response that the U.S. will explore tariffs on an additional $100 billion in goods, in turn drawing Chinese pledges for additional retaliatory measures. At face value, the nervousness in the equity markets is a reasonable reaction. After all, this type of back-and-forth resembles the very definition of a trade war, and a full-blown global trade war would, in our view, be a categorical negative for world economic growth. That said, the sharp daily market sell-offs in reaction to these verbal responses may be a bit overdone relative to the bigger outcome. We'd note two things:
$150 billion of exports represents less than 1% of U.S. GDP, and is still a relatively small amount when compared with total world trade. While the fear is that these figures could grow, they don't represent a breakdown in global trade activity.
These tariffs are not in effect. These responses are simply proposals at this point, and we think it's reasonable that they are part of a longer-term negotiation that could end in a deal that is less sweeping than current worries are suggesting.
Jobs data offer a reminder that the economy is still healthy – 103,000 jobs were created in March, softer than consensus expectations for the month; however, the broader trend shows a very healthy average of 201,000 jobs created over the first three months of the year. The unemployment rate remained at a 17-year low of 4.1%, indicating the economy continues to operate at full employment. Wage growth ticked up to 2.7%, signaling that employment conditions are likely to support higher incomes while still rising at a modest enough rate to prevent markets from becoming overly panicked about potentially-rising inflation (as was the reaction back in early February). With consumer spending and business investment accounting for three-quarters of U.S. GDP, the combination of a healthy labor market, higher consumer/business confidence, and tax cuts should continue to support a fairly solid rate of economic expansion as we progress through 2018.
Volatility is likely to continue – Market swings have been quite profound in early 2018, but it's important to keep things in perspective:
The Dow traveled nearly 3,000 points over the course of last week, with intraday swings larger than 300 points each day. The Dow has posted a triple-digit move in 34 of 45 trading days since the beginning of February.
The average daily move in the market this year has been three times larger than the average for all of last year. 71% of weeks so far in 2018 have had a 2%-plus move. There were no weeks in 2017 with a 2% move.
U.S. stocks are 9.3% below January's record high, near their lows for the year, and have logged just their fifth 10% correction since this bull market began. Despite this pullback, the U.S. stock market is still up 31% over the past two years and 366%, including dividends, since March 2009.
We doubt markets will return to the calm experienced last year. Trade fears and anxiety over future Fed rate hikes are likely to continue to spark bouts of volatility. Fortunately, we think economic and earnings trends will be a powerful offset to those risks over time. While that won't prevent tumultuous stretches like last week, we do think it's a backdrop that will keep this correction from becoming something more severe, making the current pullback a potential opportunity for long-term investors.
The week ahead
The upcoming week brings the beginning of the first-quarter earnings season. Large financial services firms including J.P. Morgan Chase, Blackrock, Citigroup, and Wells Fargo will begin reporting results near the end of the week. Economic reports to be released next week include inflation data and the Federal Reserve's minutes from its meeting in March, as well as the consumer sentiment report on Friday.

Craig Fehr is an investment strategist for Edward Jones, responsible for analyzing and interpreting economic trends and market conditions, as well as constructing appropriate investment strategies and recommendations to help investors build and maintain portfolios designed to help reach their long-term financial goals.
Craig Fehr with Edward Jones
         Fehr joined Edward Jones in 2002, holding the positions of senior equity trader and senior equity research analyst covering the financial services sector prior to his role as investment strategist.
         Fehr was named an Edward Jones principal in 2015, and is a member of the firm’s Investment Policy Committee. This group of investment professionals is responsible for constructing investment guidance and asset allocation guidelines, as well as developing the firm’s expectations for long-term capital market returns. He also chairs the committee responsible for market analysis and the development of investment guidance for Canada.
         Fehr is frequently featured in a variety of media and financial news outlets and is a regular co-host on the Business News Network (BNN) and Bloomberg TV. He has been featured in Barron’s, The Wall Street Journal, the Financial Times, the Globe & Mail, the Financial Post, CNBC, Bloomberg, Reuters and CBC Radio.
         Fehr holds a degree in finance from Truman State University, a master’s degree with an emphasis in economics from Saint Louis University and is involved in economic studies at Harvard. He also holds the Chartered Financial Analyst designation and is a member of the St. Louis Society of Financial Analysts.

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