Players in the stock market have been afraid of the raging trade wars. Surprisingly, the market, especially stocks, has been facing it without relenting. However, bonds are another cause of worry as it is indicating that the wars may have some negative consequences. For instance, S & P 500 recorded a 1% increase starting from last week when investors sold off massively. Checking on a broad index, it is still at 3.8% as it was on the 1st of May. However, this Tuesday morning saw another rise in the indexes.
On the other hand, bonds haven’t been as strong as investors expect. The “10-year Treasury yield” remains at 2.4% which represents 40 points down from its highs in 2019.
Bonds Describes The Nature of The Economy Better
Many investors in financial markets prefer bonds since they see it as a safe investment. If you compare bonds and stocks, you’ll also note that the former is not as volatile as the latter. As a result, when there is an indication of trouble in the economy, investors push their money into bonds.
According to a Ned Davis Research strategist, Tim Hayes, bonds are always the better descriptor of how the environment seems. Tim stated that it is easy to prove this because investors allocate more to bonds than to stocks when things are bad. He went further to point out that the trade wars have affected the bonds yields globally. The implication is that the events in the economy have affected bonds trading drastically.
For instance, a hike in tariff on Chinese goods worth $200 billion by Trump’s administration may have set the ball rolling. As the U.S tightened its trade, the Chinese government did the same thing. China raised a tariff against $60 billion U.S products and skyrocketed the trade wars. The US government has been escalating the tensions between them and China. Trump restricted U.S companies who do business in Huawei. Companies such as a telecom provider, Google, Qualcomm and even Intel may no longer operate in Huawei for now. However, on Monday, the Department of Commerce allowed a “90-day reprieve” for companies who provide internet and phones in Huawei. All these events are contributors to the drop which the market is seeing in the bond yield. According to Hayes, the investors are waiting to see the outcome of the latest tariffs on the upcoming economic data.
Stocks didn’t Give In to Trade Wars but It May Not Last Long
We’ve seen that stocks have recovered impressively since December. However, it is important to point out that the gains are not as much as investors expect. Also, the areas where the gains are coming out are not the usual places.
According to Dave Haviland, a Beaumont Capital Management partner, some stocks are not performing well. For instance, the likes of transports, small caps & mid-cap have not made any record highs in 2019. Instead, it’s the four sectors in the S & P 500 that is breaking the records.
Therefore, the conclusion is that there is still trouble ahead for the stock market. That’s is, if the wars continue.
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