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May 2019

The year has been a roller-coaster due in part to the dysfunction of our government, and the mixed signals sent both domestically and internationally over the many issues surrounding politics and economics. As I always say, I take no sides- this letter is to update you on what is going on, and how it is affecting the markets and economy and know that my intention as always is to keep you apprised and educated. It is important to note however and most importantly, that the markets and the economy are two separate issues, often confused but non-the-less very different. This memo is to address the current tariff situation and the effects of BOTH the market and the economy.

Volatility surged to multi-month highs last week as US-China trade war drama unexpectedly escalated. The S&P 500 fell 2.18% on the week which showed huge swings from Monday through Friday. Stocks opened sharply lower on Monday morning after President Trump threatened to more than double the rate of existing tariffs on Chinese imports as well as add a new wave of tariffs on additional goods. After the initial shock, investors began to digest the threats as a negotiating tactic that would potentially improve the odds a deal got done last week, and the S&P rallied steadily after a resurgence of market-anxiety surrounding trade weighed heavily on risk assets Tuesday after US trade officials confirmed tariff hikes while economic data was mildly underwhelming overseas. Wednesday was a day of digestion amid quiet news flows leading US stocks to grind higher most of the session before selling off late in the day to end down 0.16%. Thursday, stocks opened sharply lower after Trump said China "broke the deal" but ended up closing in the negative less than a half point. Stocks opened with modest losses on Friday after the US raised tariffs on $200B of Chinese imports from 10% to 25%, which prompted China to pledge an "appropriate response," and that caused the S&P to fall to the lowest levels since late March. The selling pressure eased over the lunch hour; however, and optimistic comments by Trump and Mnuchin spurred a "squeezy" rally into end of the week leading the S&P to rise 0.37% Friday.

Over the weekend, Trump tweeted that China "best not retaliate" to his tariff raise- naturally, and to no surprise, they retaliated with another $60 billion in tariffs starting June 1st. I summarized the past week just to illustrate to you how much change goes on in any given week these days. This is an example of how outside stimuli may affect BOTH the markets and the economy- the tariffs, contrary to the White House tweets and press releases, will actually be borne by you and I, the American consumer- not China. Add to that good ole' American capitalism, and we are in for a world of pocketbook hurt. While there are new tariffs on washing machines adding an average of about $100 to our purchase, there is no added tariff on the dryer- but your local appliance store has raised the price of the dryer $100 also, even though their cost by tariff has not changed. As consumers, we are all caught in the middle.

Unfortunately, as of this writing at noon on Monday we're seeing Friday's rally given back this morning (and then some) because of this fact: U.S./China trade talks didn't collapse on Friday, but there's no clear "next step" in the negotiation process. Both the U.S. and Chinese side have said more talk will continue in Beijing, but there's no firm date and neither side has officially confirmed a next meeting. So, while talks didn't breakdown (this would be a worst-case scenario), there isn't a clear next step either.

Going forward, if there's no progress over the next few weeks, trade will become a modest headwind, and if the talks break down altogether (which they did not on Friday) then obviously that's something more significantly negative. Conversely, a "deal" (which would be what we all expected two weeks ago) is probably good for a 1% or 2% initial rally in stocks, but to be more than that we'd need to see a positive surprise (so all tariffs removed immediately) and that seems very unlikely. Bottom line, trade uncertainty is still a mild headwind on stocks and growth now because it's still widely assumed a deal gets done. If that expectation changes, trade will become a material headwind on equities. We continue to be cautious in our allocations and monitoring the situation. Looking forward, the Fed declined to either raise or drop interest rates at the recent meeting so that leaves the interest rate situation status quo for now, indicating small concern for inflation or recession. The past 2 quarters have not been good for quarterly earnings which shows a slowing of corporate profits. It would be a mistake to think that any of the ongoing issues facing us are resolved, so we remain cautious on risk assets as we look for some signs of stabilization. Until then, it will continue to be a nail biter. If you have any questions, as always give me a call and let's discuss it. It's an uncertain time for all...

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