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How quickly things change. At the end of April, investors seemed confident that the U.S. and China would reach a trade deal and that the Federal Reserve would keep easing monetary policy—two major expectations that may have driven the S&P 500 to a 17.5% gain in the first four months of 2019.

In early May, however, U.S.-China trade tensions have escalated significantly, Fed policy seems much more neutral, geopolitical risks have risen—in Iran, North Korea and Venezuela—and for the moment, stocks have faltered.


Volatility has reawakened, amid greater potential for global growth to slow and stocks to suffer. But opportunities may also surface in some areas, such as emerging markets. Investors need to keep close watch on market events, as the outlook evolves. Below are three keys to understanding market direction:

  • China and the U.S. are on different economic trajectories: When trade tensions escalated in 2019, China’s economy was slowing, while U.S. growth was strengthening. Currently, with its economy regaining some momentum, China may be better able to weather prolonged trade tensions than it was a year ago. Meanwhile, the benefits of tax reform are fading in the U.S. Ultimately, I think the U.S. and China will reach a trade deal, but it may take a while.

  • U.S. corporate profit growth is weaker: Companies are facing higher costs—not just from tariffs, but also from more expensive labor and materials, which are contributing to shrinking profit margins. At the same time, expectations for corporate capital spending have been falling. That trend could worsen as geopolitical uncertainty increases.

  • The Fed seems less likely to cut interest rates: While a rate cut might help if the U.S. economy weakens due to trade conflicts, the Fed may be reluctant to make that move. Tariffs contribute to rising prices, and a rate cut would likely exacerbate inflation, which the Fed tries to keep under control. A rate cut might also cause investors to question the central bank’s independence, as the current administration has been vocal on that topic.

Investors shouldn’t necessarily fear any flare up in volatility kindled by the latest round of geopolitical risk. As that risk is priced into markets, opportunities will arise. For example, emerging market stocks, which are hurting now, could benefit once a trade deal is reached.

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