The U.S.-China trade salvo continued after the weekend with China retaliating for the planned September 1 U.S. tariffs on $300 billion in Chinese goods. China devalued its currency, with the Yuan falling to its lowest value in 11 years relative to the U.S. dollar. China’s state media announced that Chinese-related companies have discontinued purchases of U.S. agricultural goods. The S&P 500, a proxy for large U.S. stocks, lost nearly 3% on Monday after dropping 3% last week, its worst one-day drop since February 2018. The technology sector took the brunt of the losses as markets continued to price in the impact of potential U.S. tariffs and the potential escalation of punitive measures. Investors sought safe havens in major foreign currencies, such as the Euro and the Japanese Yen, high quality U.S. Treasuries and gold. The 10-year U.S. Treasury rate fell to 1.74%, its lowest level since November 2016, and gold prices rallied another 1.5%. The trade war’s back-and-forth will likely keep risky global assets under pressure until the conflict moderates and there is little sign of further escalation.
In addition to trade policy uncertainty, we remain concerned with the softening pace of domestic and non-U.S. economic growth. Trade uncertainties are likely amplifying these growth issues. At the current expected pace of interest rate cuts, easier global monetary policy is likely insufficient to arrest slowing global growth. The decline in stock prices is narrowing the “wedge” we have seen between prices, which have largely moved up except for the last three trading sessions, and economic fundamentals, which remain more challenged and have been for several quarters, albeit from a strong base. While we remain concerned about deterioration in growth and we believe recession risks are rising, our view is that the solid level of consumer health should be sufficient to avoid recession. Consumer confidence remains strong, consumer debt levels are in line and the labor market remains strong.
Our modestly positive economic view implies the current environment may be a potential investment opportunity rather than a risk to be eliminated. At this point, we do not anticipate cycle-ending economic weakness to emerge, but we do expect more market volatility given concerns about both trade policy and monetary policy. We are maintaining our current balanced risk assessment between stocks and bonds. However, we are readying investment opportunities should the scales tip out of balance to indicate attractive entry points into certain asset classes and strategies.