Tariff fears are real and have come full circle in the market since the beginning of May.
Up until this point in 2019, there was quite a bit of optimism that the US-China trade relations would continue to improve and even culminate in a trade deal that was livable for both sides of this trade war.
Perhaps in true fashion, the markets got ahead of themselves in this hope. It has been one of the risks we entered 2019 but one that was largely seen as likely to have a good outcome. However, this is a good reminder that risks which appear to be small and insignificant, can rise. This reality is also more pronounced when it is geopolitical.
Political risks and geopolitical disputes are often rumored with little information until there are blaring news headlines. Even geopolitical risks that we know about, like the trade talks, are subject to the information conveyed by both sides publicly. Outcomes tend to be binary and possibilities for surprise on both the good and bad side are heightened.
Anybody who claims to know exactly how this will turn out is lying. The one thing we know is that this will continue to be a theme that we have to carefully watch. We will be watching for how it affects underlying economic strength, possibilities for deepening trouble and lastly, the affect it has on an increasing number of countries and corporations.
There is one very interesting reality that is already being observed. Market crowd sentiment reached a peak on April 29th. Sentiment measures the amount of optimism from investors. As of last Friday, the number had some of the froth taken off but is nowhere near the contrarian levels that would indicate a likely surge. This indicates that many investors still think everything is going to work out.
Current sentiment levels suggest that the market is susceptible to further shock if trade talks continue to deteriorate and the trade war escalates. Even through some of the over-optimism has been reduced, markets still remain optimistic that we will see a positive trade resolution.
What does this mean for investors? Outcomes are unpredictable and it can be a difficult decision to make. Making sure you are comfortable with your approach is likely going to dictate your own reactions to how this market develops.
I wish we had a crystal ball, and there are some things we can get a great perspective on with sophisticated modeling, but geopolitical risks are an area that honest managers must admit is beyond our capabilities of consistently and accurately modeling.
The good news is that oftentimes geopolitical risks work themselves out or begin to give clear economic indications in a relatively short period of time. Once we have that data, we can appropriately respond. Until then, tariff anxiety is likely something we will all need to deal with to some extent.
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