Caught by the headlines

by: , Multi-Asset Solutions team, New York Life Investments

After a six straight day decline, the U.S. equity market has fallen nearly 6% from its all-time high set last month.

Two key reasons why markets are moving now

First, there is a growing consensus that U.S. economic growth is slowing. Earlier in the year, mixed economic data and the promise of accommodative monetary policy outweighed concern about a potential trade deal relapse. Now, as market participants have become more pessimistic about the economic outlook and interest rates, they perceive less buffer between headline risks and real business activity.

Second, trade wars are back with a potentially harder bite. From the U.S., President Trump announced a new 10% tariff on US$ 300 billion of imports from China, which will come into effect on September 1 if negotiations do not determine otherwise. In turn, China is allowing its currency to depreciate (which induces dollar strength) and has threatened to halt agricultural purchases. These new actions have a higher likelihood of impacting the U.S. consumer, which makes up two-thirds of the economy.

Why does it matter?

We believe the factors underpinning current market volatility threaten three major economic storylines: dollar strength, the U.S. economic trajectory, and the Federal Reserve’s policy.

One of our most important indicators to watch in the ongoing trade negotiations was non-tariff retaliation from China including currency devaluation and increased oversight. On Monday, the Chinese Yuan (CNY) exchange rate fell to 7.0 yuan per U.S. dollar – the weakest in over a decade. The active depreciation of the Yuan against the dollar draws attention to two major considerations. First, it increases the likelihood that disruptive negotiations continue well beyond the end of the year. And second, a weaker Yuan, if sustained, increases import prices for Chinese businesses and consumers, reducing demand and potentially weakening global growth.

The weakness in the global economy has so far been concentrated in the export-focused manufacturing sector, but we see signs that this condition is now spreading to the broader economy. In the U.S., recent surveys within the services sector suggest this very case may be coming to fruition. We do not consider this to be an immediate warning sign for recession – employment growth and household balance sheets remain solid – but it is undoubtedly a concern.

We suspected the second Federal Reserve rate cut would come in September or October, but the ongoing slowdown in service-sector activity growth, the escalation of trade tensions, and the ongoing sell-off in the stock market make us more confident in that view.

Bottom line

We believe the equity markets could continue their decline another 2% or so, until this headline news shakes out. Without any positive catalyst (i.e. positive trade developments or improving economic data), we expect market volatility to continue, credit spreads to widen, the dollar to strengthen, and the Fed more likely to ease again in September.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

“New York Life Investments” is both a service mark, and the common trade name, of the investment advisors affiliated with New York Life Insurance Company.


Multi-Asset Solutions team

Multi-Asset Solutions team, New York Life Investments

Multi-Asset Solution’s (MAS) is New York Life investments’ specialist in multi-asset investing.The team offers multi asset strategies, market intelligence, and customized solutions to its strategic partners. Managed assets include MainStay funds, strategic partnerships and customized solutions with third parties. Investment services include market insights, risk analysis, and financial education. Strategic partnerships are designed to meet bespoke investment objectives, such as income generation or inflation protection, through holistic solutions.

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