In the June issue of our monthly flagship publication, we feature:

  • On the Record by Chief Investment Officer Tony Roth, where he talks about the confluence of political and economic factors that led our Investment Committee to reduce a years-long overweight to equities—with the proceeds shifted first into cash, and later, fixed income—and our continuing concerns.
  • In Focus by Chief Economist Luke Tilley takes a deep dive into the subject of tariffs—covering everything from what they really mean to consumers to a look at what has transpired thus far to get us to the trade war we are embroiled in today.
  • Investment positioning, major themes, and asset class positioning updates.

At the heart of it, investing is all about making decisions in the face of uncertainty. One of the tools we employ to manage this uncertainty is scenario analysis, where we examine a series of “if, then” statements: “If X, then we would expect Y.” Trade and tariff developments have been important considerations in determining the most likely path forward for the economy and financial assets.

Underpinning our bullish portfolio positioning over the past year has been an assumption that a trade deal between the U.S. and China would be reached within a reasonable timeframe and, importantly, without further escalation of tariffs beyond the 10% on $200 billion of imports from China. In other words, “If the China trade dispute is cleared, then the global economy would likely get a needed shot in the arm, and markets would go up.”

Unfortunately, the assumption of our syllogism broke down over recent weeks amid an escalation of tariff and non-tariff measures. What seemed at first like another round of tough trade tweets from the Trump administration soon revealed, in our view, a fundamental breakdown of talks between the two sides. While a deal is certainly in the best interest of both the U.S. and China, it has been increasingly clear that: (a) the Chinese negotiators are not serious about striking a deal that results in structural changes to their economy and business practices; and (b) that the Trump administration will be politically unable to accept a deal without teeth in the run-up to the 2020 election. The non-tariff shots being taken—including the U.S. restricting sales to Chinese telecom company Huawei and the Chinese threatening to halt the export of rare earth elements—could result in scars for both countries that take a long time to heal.

In addition to the ongoing rift with China, the president introduced yet another risk with his surprise announcement that tariffs will soon be levied on all imports from Mexico, tied to his goals to eliminate illegal immigration through the southern border. While there are still many questions to be answered on that front, the action cements our view that trade and tariffs present a significant and swelling risk for the economy and markets going forward.

Please see important disclosures at the end of the article.

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