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Stocks close lower in volatile week on trade war fears

The best way to measure your investing success is not by whether you’re beating the market but whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go. – Benjamin Graham

It was another volatile week for stocks and when the closing bell sounded on Friday, all three of the major stock averages had closed modestly lower. The stock market had strung together three consecutive up days and was headed for a positive week until President Trump said that he would consider imposing an additional $100 billion in tariffs against China. That announcement sparked renewed fears of a trade war with China and the stock market plunged over 2% on Friday. Even Treasury Secretary Steven Mnuchin commented that there is a possibility of a trade war if negotiations with China fail to produce an agreement that results in fairer trade policies. Earlier in the week, China had announced tariffs on 128 U.S. products in retaliation for tariffs on steel, aluminum and select technology products. While the U.S. and China are expected to hold talks over the next several months to resolve their trade differences, investors fear that a lack of progress might quickly escalate into a trade war. Trump’s tough talk may be seen by some as a negotiating ploy but his war of words could also undermine the talks and hamper any negotiations. Technology stocks fared the worst last week as President Trump continued to be critical of Amazon and concerns rose that the technology sector could be hit with government regulation. Another possible reason for the market’s sell-off on Friday might have been the March employment report, which showed that only 103,000 jobs had been created versus expectations of 180,000. The unemployment rate remained at 4.1%, though, and with an economy at or near full employment, it’s not unusual for hiring gains to slow at this point in the expansion. Average hourly earnings rose in line with expectations, too, so wage growth was not considered worrisome as to be inflationary. The market seems to be trading on fear instead of fundamentals right now and there is a lot of uncertainty, which is causing increased volatility. There is little news with which to trade stocks on, too, but that will change this week as the first quarter earnings season begins.

Last Week

The ISM manufacturing index for March was slightly less than the reading in February but was still strong while the ISM non-manufacturing or services sector index also fell slightly but was comfortably in expansion territory. U.S. factory orders were also strong in February and were boosted by strong demand for transportation equipment, a positive sign that the manufacturing sector is strengthening. The ADP report on private sector payrolls showed that 241,000 jobs were added in March, much better than expected as employment in construction and manufacturing were particularly strong.

For the week, the Dow Jones Industrial Average dropped 0.7% to close at 23,932 while the S&P 500 Index lost 1.4% to close at 2,604. The Nasdaq Composite Index tumbled 2.1% to close at 6,915.

This Week

Investors will get a good read on inflation this week as the March producer price index (PPI) is expected to increase only modestly while the consumer price index (CPI) is expected to remain flat. Import prices for March are also expected to be benign. The April University of Michigan sentiment index is forecast to be slightly above 100, an elevated level that suggests that consumers remain confident and optimistic about the economy and its prospects going forward.

Financials will headline the first week of corporate earnings season as Citigroup, JP Morgan Chase, Wells Fargo, PNC Financial and Blackrock are scheduled to report their first quarter earnings reports.

Portfolio Strategy

While last year’s stock market action was relatively quiet and notable for its lack of volatility, this year has been characterized by wild swings in the market and more heart-stopping moves. From January 26th through February 8th, the S&P 500 Index plunged 10.2%, defined as a correction, that was mostly triggered by higher than expected wage growth in the January employment report, which prompted fears of higher inflation and higher interest rates. Although the sell-off was short and confined to about two weeks, the stock market has remained volatile since then on trade war fears and fears of increased regulation aimed at technology companies in the wake of Facebook’s failure to protect customer data. President Trump has only added to the volatility as he continues to slam Amazon because it doesn’t pay its fair share of taxes. This increased volatility can certainly be unnerving for investors, but in the majority of cases, investors would be best served by standing pat and not making any major changes to their portfolios. Most of the significant declines in the market have been caused by Wall Street professionals and traders who are trading-oriented and who make their money by creating volatility in the markets. The fundamentals of the economy remain sound and first quarter corporate earnings are expected to increase by about 17% over the same period last year. With the S&P 500 Index trading at about 16.5 times estimated earnings for the year, only slightly above its historical average, a strong earnings season bodes well for the stock market and should lend support for stock prices.