Whiplash volatility continues to be the norm. US stock market indexes lost, and then regained, about 5% of their value over the course of the past week.
At the week's beginning, investors worried about tariffs and the possibility that Fed governor Jerome Powell could be replaced. (Nothing undermines a currency like the idea of a less-than-independent new central bank head.) By the end of the week, however, comments on both China and Powell were more conciliatory.
As we have previously written, unclear policies result in businesses and consumers pausing to wait for clarity. And pauses can become real economic pain.
Indicators don't yet show much of a consumer spending slowdown, but manufacturing activity has contracted for two consecutive months. Meanwhile, corporate leaders are expressing caution on a variety of fronts. Economic indicators, of course, only report what has already happened, and with a significant lag. Companies, one the other hand, comment often on trends that could impact their future earnings.
Since it is nearly impossible to predict economic activity with any precision or timelines, we won't place much stock in speculative comments in the media or in an indicator that could be revised months later. The unpredictability of the current administration means that is foolhardy to trade on today's headlines.
Instead, we remind investors that this is why one should be diversified. Portfolio allocations outside of the US are finally paying off after years of underperforming domestic indexes. While the S&P500 is down 8.6% YTD, the MSCI EAFE Index (Europe Australasia and the Far East) is up 9.3%.
This is a big recovery in a short period of time. Much of this outperformance is attributable to weakness in the US dollar -- which is down 9% this year versus the euro (see paragraph two above.)
Perhaps the best takeaway from the past week isn't anything more specific than that this administration does react to pressure - from markets, currency movements and corporate chieftains explaining the impact of policy actions on their businesses.
It's not the way anyone would wish for world-impacting policies to be formed, but it may be better than continuing to drive headlong into the brick wall of economic reality. The unfortunate circumstance is that some economic damage has likely already been done, and more may still be occurring thanks to unclear and rapidly changing policies.
Until corporations stop using the terms "pause" and "uncertainty" in their comments, we are not likely out of the woods yet.