The month of May saw a stark reversal of the upward trend in the markets we have seen year to date.  While the market remains up over 10% YTD, the S&P 500 is 6% lower than the all-time high reached in April.

In our previous newsletter we outlined the incentives in place that made the reaching of a trade agreement between the US and China a probable positive outcome.  While those incentives remain largely intact, the tensions since that newsletter have ratcheted up somewhat.  In addition to economic tensions between the US and China, the President threatened through a Friday Tweet that the US would levy tariffs against Mexico as a mechanism to pressure the country to address illegal immigration across the United States’ southern border.  While both trade disputes have muddied the growth outlook for the US economy and led to a steady selloff in the stock market, they each come from a very different fundamental set of circumstances.  The Chinese trade tensions are firmly defined by an economic purpose.  The goal with China is to open the Chinese economy to freer trade and produce a more favorable outcome for the United States as an exporter of goods.  While tariffs should never be utilized on a permanent policy basis, the administration sees them as a useful tool in the trade negotiations.  Today’s threat against Mexico sees the White House using that same tool for much more politically entrenched purpose: to achieve the President’s promise to strengthen the US border and curb the flow of illegal immigration.

Just as with the Chinese tariff dispute, there are several incentives for a standoff with Mexico to be short lived.  In the background of any tariff threats against Mexico exists the lingering potential passage of the much needed United States-Mexico-Canada Agreement (USMCA) as a replacement for NAFTA.  Mexico was seen as a likely winner of continued deterioration of US-China economic relations once a permanent free trade agreement with United States is implemented.  With that result not as certain as once assumed, corporations will have lingering concerns over the two country’s industrial and commercial relationships as well as global businesses continuity of supply chains.  Mexico, much like China, is an export-based economy. Additionally, it is a much smaller and more vulnerable one than that of the United States. Heavy incentives in maintaining a stable economy and country exist that should have Mexico eager to have uncertainties over a trade agreement alleviated.  In order to achieve an agreement and stave off tariff threats, Mexico will need to make efforts addressing the concerns of the US President.

Ultimately, our firm’s view regarding both tariff-related disputes is positive, despite the fact that there may be some additional short-term wrangling between the administrations over a resolution.  We believe that the incentives for a harmonious trade relationship will tilt the odds in favor of a deal being completed for all parties.

The risks produced from tensions such as these can be mitigated through diversified portfolios that incorporate a diversified variety of uncorrelated asset classes.  Our portfolios are designed to avoid the concentrating of assets so that the portfolio counts on a specific outcome for the market.  In May, this strategy has played out positively for our Tactical Asset Allocation Portfolios (TAAP), as every model outperformed the S&P 500 index for the month.

As always, if you should have any questions about the information outlined above, do not hesitate to reach out to our team.

©2018 Rhame & Gorrell Wealth Management The Woodlands. All rights reserved. |   Disclosure   |   Sitemap |   Hand crafted by Design Squid

Log in with your credentials

Forgot your details?