Gill Capital Partners May 2019 Market Commentary
What are we talking about at Gill Capital Partners?
Our Investment Committee meets regularly to review portfolio allocations, macro-economic events and our investment managers. Below are some areas that are currently top of mind within the Committee.
U.S.-China Trade War
The latest round of trade talks broke down following an apparent last-minute reversal by the Chinese delegation. The reversal relates to concessions that have long been sought to level the playing field with China on trade. These concessions were focused on areas including protection of trade secrets and data, IP enforcement, software piracy, barriers to market access, and copyright protections, to name a few. China ranks close to the bottom globally with respect to intellectual property protection, forced technology transfer and preferences for domestic companies as measured by the World Trade Organization (WTO). U.S. trade negotiators have been attempting to get China to make concessions for the past 15+ years in these areas, so far without much success. Following the breakdown in negotiations, the U.S. announced that further tariffs will be added on $300 billion of Chinese imports in June. If the Trump administration follows through with this, it will be the 5th round of tariffs and will take the effective tariff rate (on all imported goods) up to nearly 7%. This marks the highest rate since the early 1970s, but is still a far cry from the near 20% rate seen in the 1930s. What is the estimated impact of the tariffs on U.S. growth, inflation and earnings?
· Impact on GDP – A recent Yale/Berkeley/Columbia study estimates that the current level of tariffs will equate to a net reduction in U.S. GDP of only 0.04% after incorporating high consumer prices, increased tax revenues and higher revenues for domestic producers.
· Inflation – The impact on inflation is a bit more difficult to estimate, as forecasting substitution to U.S. goods or non-tariffed foreign goods is challenging. However, estimates range from a 0.1%-0.9% one time increase in the rate of inflation (surprisingly modest).
· Earnings – While the impact of growing tariffs on GDP and inflation is projected to be minimal, the impact on earnings could be more pronounced. Globalization has been a key factor driving U.S. profit margin expansion. It has allowed U.S. businesses to hold price and wage inflation low and has boosted offshore revenues. Technology companies have the highest percentage of foreign sales at around 50%. The impact on U.S. technology and industrial earnings could be meaningful if there is a protracted trade war.
Our View:
Since the trade discussions with China began, the market has priced in an optimistic view that a deal would be made, and we generally agreed. Following the recent breakdown in negotiations, analysts and investors are beginning to strike a more cautious tone, as are we. We are still cautiously optimistic that a trade deal will eventually be reached, but following the recent breakdown in talks, the odds of both sides coming to a relatively quick agreement or an agreement at all have come down considerably. Unfortunately, we will likely have to wait a while for any concrete outcome. With this less optimistic view comes the potential for increased volatility in global capital markets, which we have seen over the past couple of weeks. Resolution of the trade war with China, or a lack thereof, will certainly be the most important wild card. We believe the outcome will likely create a binary reaction of sorts, with a positive resolution likely sending markets materially higher, and a lack of such resolution or further escalations will likely have the opposite impact. This is in line with our current more “neutral” positioning across client portfolios.
Gill Capital Partners -Client Education Event
Gill Capital Partners invites you and a guest to our Annual Economic and Market update Event.
We are pleased to announce that Alex Dryden, Vice President and Global Market Strategist at J.P. Morgan Asset Management, will be joining us this year to discuss the current economic landscape and current trends taking place.
About Alex Dryden - As the Vice President and Global Market Strategist at J.P. Morgan Asset Management, Alex is a fixed income specialist responsible for delivering timely market and economic insights to clients across the country (literally). He is also a frequent guest on CNBC, Bloomberg and other major news outlets. Alex joins us from the UK, where he earned a degree in international business, Finance and Economics from University of Manchester in England. Not only has Alex brought his knowledge and expertise to the U.S., you may her him discuss his love for rugby and football. Alex is a CFA® charterholder, a CAIA® charterholder, and has completed the Investment Management Certificate (IMC).
Tuesday, June 18, 2019 Denver Country Club
11:30am to 1:30pm 1700 East First Avenue
Lunch will be provided Denver, CO 80218
RSVP to Erin Beierschmitt at 303-296-6260 or via email at ebeierschmitt@gillinvest.com.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.