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Trade Tensions Weighing on the Markets

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Written by:  | Russell Investments

Trade-war worries keep markets on edge

Markets were a bit on the skittish side the week of July 9, Eibel said—with major indexes declining on July 11, before rebounding the following day. The key reason? Ongoing tensions centered around trade and tariffs, he said, noting that the issue is one markets aren’t shrugging off. “It seems that whenever trade talks heat up—or whenever new tariffs are proposed, particularly between the U.S. and China, the market trades down,” Eibel stated—“and whenever talks ease up in the slightest, or the back-and-forth language between the two nations relaxes to a degree, the market trades up.”

Primarily because of this, there’s been much more volatility across the board in markets this year, he said. In addition, Eibel noted that the ongoing trade disputes between the U.S. and other countries appear to be weighing more on market participants, as evidenced by the 1.1% drop in U.S. consumer confidence from June to July, per the University of Michigan’s consumer sentiment index. The impact of tariffs may become even more of an issue in the U.S. as the country moves toward congressional mid-term elections in November, he added.

U.S. inflation on the rise

Turning to inflation, Eibel said that the U.S. Labor Department’s Consumer Price Index (CPI) rose 2.9%, year over year—the sharpest increase in over six years. Core inflation, which excludes food and energy prices (which tend to be more volatile), rose 2.3% year-over-year, he noted. However, from May to June, consumer prices rose just 0.1%—a very modest number, Eibel said.

Related: The Portfolio Implications of Trade Disputes

“It’s important to remember that, when looking at changes in year-over-year inflation, sometimes the number from the month that drops out of the newest calculation moves the overall inflation number more than anything else,” he stated. With this in mind, Eibel believes that the latest inflation data isn’t overly concerning for the U.S. Federal Reserve. “Overall, I don’t think the latest numbers will impact the central bank’s plans for one or two more interest rate increases in 2018,” he said, adding that next year could be a different story.

Rosy outlook for second-quarter earnings season

Second-quarter earnings season kicked off the week of July 9 amid a noticeable lack of press coverage, Eibel said. “The larger financial companies and banks have started reporting, which usually leads to big headlines—but the focus this week has been on tariffs and meetings between world leaders,” he noted. Eibel and the team of Russell Investments strategists expect a good earnings season, and he believes that the anticipated positive results may start getting investors focused in again on the strong fundamentals in markets.

So, what’s the outlook for earnings growth going forward? “All things considered, we’re probably getting close to the peak, if we’re not there already,” Eibel concluded, adding that he expects the results to look especially good for the second quarter, due to weaker earnings from the energy sector in the second quarter of 2017.

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