October was a frightening month for risky assets. Comments from the Federal Reserve suggesting higher U.S. interest rates, continued trade tensions between the U.S. and China, and expense and profit margin pressures for big companies conspired to push bond yields up and stock prices down.
July ended a news-rich month with favorable returns for global equities and the higher risk sectors of the fixed income market. Support came from strong second-quarter earnings reports and a jump in GDP to its best level in four years. Tariffs remained a focus but the tone was light and improved with a new agreement with Europe and no escalation with China. Late in the month, the news cycle flipped to earning misses from highly owned Facebook, Twitter, and Netflix.
The concept of a level playing field tends to resonate with most Americans. In the field of trade, China, Canada, Mexico, Japan and Germany are the U.S.’s top trading partners. America runs a trade deficit with each of these countries, but the deficit with China is particularly large: $375 billion in 2017, which accounts for 2/3rds of the entire U.S. trade deficit with all countries. And the size of the gap has been growing ever since China entered the World Trade Organization at the end of 2001. Chinese subsidies to local companies and intellectual property rights issues may have accelerated this imbalance. So perhaps some leveling is in order.