The escalation of the trade war between the United States and China continued in July. Early in the month, $34Bn of announced tariffs went into effect and later in the month, President Trump announced two additional sets of tariffs for goods worth $200Bn and $500Bn. With trade headlines constantly in the news since March 2018, the global equity markets seem less negatively impacted with each passing month. In July, global equities were up sharply, appreciating 3.0%. All major developed equity markets appreciated, in addition to emerging market equities (1.8%), which ended a two month losing streak. Developed markets were led by the U.S., up 3.7%, while international-developed markets rose 2.6%. While EM equities appreciated in July, China was an exception to this – Chinese equities lost 2.5% in the month.
Positive U.S. equity performance was driven by a strong start to the Q2 earnings season, where over 80% of companies beat analysts’ expectations. Furthermore, during Fed Chairperson Powell’s first semi-annual address, he reported the U.S. economy to be in strong shape and growing. Reflecting positive sentiment in the market, U.S. equity volatility (as represented by the VIX Index) ended the month at 12.8, well below the Index’s long-term average of 19.3.
Global fixed income markets were slightly down during July, falling 0.2%. This movement was led by Japanese government bonds (“JGB”). Due to speculation over the Bank of Japan’s policy changes, JGB 10Y yields rose 5 basis points. U.S. fixed income markets ended the month flat, gaining only 2 basis points during July.
In another sign of the risk-on environment, gold depreciated further, down 2.5% during July following a decline of 3.5% in June. The July closing price of $1,224.15 per ounce was close to a 1-year low.
A Tale of Two Countries
- President Trump’s first tariff announcement against China occurred on January 23, 2018 (start date of chart below) which affected solar panels and washing machines
- Subsequent U.S. and retaliatory Chinese tariffs were imposed regularly thereafter, but the performance of the two country’s stock markets has been quite divergent, suggesting the impact is not equally distributed.
- U.S. performance +1.7%, China performance: -16.3%
U.S. equities represented by S&P500 Total Return Index
Chinese equities represented by MSCI China Net Total Return Local Index
Short-Term Market Outlook
The economic climate at the end of July was robust, as reflected by our leading indicator index. The core driver of this position was strong, positive growth in our measurement of global trade. This reflected demand-driven price increases in dry goods shipping. The strong economic outlook contributed to our favoring stocks over bonds at the end of July. In addition to the economic environment, relative valuation between stocks and bonds continues to favor stocks. We measure relative valuation using a modified version of the Fed Model, which compares earnings yield to U.S. treasury yields.
Our preference for international-developed stocks remained in place at the end of July. This position was driven by steeper yield curves and more favorable valuations in international equity markets compared to the U.S. equity market. Steeper yield curves typically signal inflation and GDP growth, boding well for those country’s stock markets.
This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or QS Investors, LLC to enter into or arrange any type of transaction as a consequence of any information contained herein. QS Investors, LLC does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of QS Investors, LLC, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person. The views expressed in this document constitute QS Investors’ judgment at the time of issue and are subject to change. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. This document is only for professional investors. Investments are subject to risks, including possible loss of principal amount invested.
 Unless otherwise noted, asset classes herein refer to the specific indexes referenced at the end of this commentary. All returns and levels are on the U.S. market close.
Global Equities represented by the MSCI ACWI Gross Total Return Local Index; Emerging Market Equities represented by the MSCI EM Gross Total Return Local Index; International Equities represented by the MSCI EAFE Gross Total Return Local Index; U.S. Equities represented by the S&P 500 Total Return Index; Chinese Equities represented by MSCI China Net Total Return USD Index; U.S. Dollar (USD)represented by the Bloomberg Dollar Spot Index; Global Fixed Income represented by the Bloomberg Barclays Global Agg Total Return Index Value Unhedged USD; U.S. Fixed Income represented by the Bloomberg Barclays U.S. Agg Total Return Index Value Unhedged USD; Gold represented by Generic Front Month GC Contract (Bloomberg).
QSCR 18221 (August 2018)