News vs Noise

I almost always come into the office on Friday’s thinking, “Wow, what a week. What could possibly be next?” What I’ve come to find, there’s always something. People tell me all the time how they can’t even imagine what it’s like to have to manage investment portfolios in this environment. The last couple of years have been as difficult as any in my 20+ year career. And it’s a period of time where the Dow and S&P have hit all-time highs! These are unconventional times. No question. That’s actually a complete understatement now that I wrote it. What is normal anymore? Breaking from the norm has become the norm in Washington. But the world has been calling for change from the status quo for years. It’s happening. It’s happening big time.

The challenge in navigating this environment as an investor is interpreting what is actual News versus what I’ll call Noise. There’s a lot of noise these days; more than I can ever remember. Part of it is certainly a result of the 24/7 news cycle and the evolution of social media. The Digital Age is always open. It’s not always helpful. Politics are historically tricky topics of conversation, but today it’s like a 3rd rail. The topic has become so emotional. They sure do top the headlines though. There’s more noise in politics than anywhere else. It can be really tough to navigate. It’s at times a dangerous topic to discuss. Strong feelings are everywhere and it’s become a feeding frenzy for debate. The boring stuff rarely steals headlines. Earnings are growing at a rapid rate and the US Economy is showing signs of accelerating. These topics are probably in the boring bucket. But that’s definitely news worthy in our minds. It’s the most significant Market driver. That’s where we focus.

This was a significant week for news and events. It started with a Presidential summit in Helsinki and it ended with a threat of $500 Billion in tariffs on China. President Trump also accused China and Europe of manipulating their currencies in unfair trade. He also questioned the Federal Reserve and its rising interest rate campaign, though he did endorse Chairman Powell. It’s also being reported that President Trump has invited Vladimir Putin to Washington this Fall. Boy, will that attract some attention… The last American visit by a Russian President was in 2010, when Dmitry Medvedev, now the Russian Prime Minister, visited Washington and the Silicon Valley. News or Noise? It’s a whole lot to chew.

$500 Billion in tariffs on China would be huge news, but right now seems like noise. That would account for the totality of Chinese imports to the US. The President said “I’m not doing this for politics, I’m doing this to do the right thing for our country,” and that “we have been ripped off by China for a long time.” China has not been a fair trader for years, that is true. This massive tariff would up the ante in the trade war with Beijing and could slap tariffs on every Chinese good imported to the U.S. This compares to $130 Billion the U.S. exported to China last year. The US has a trade deficit of roughly $370 Billion. But that is how many normal relationships in commerce work. I have a huge trade imbalance with Safeway. I spend roughly $150 per week there. Safeway doesn’t buy a thing from me. But the relationship works. Intellectual property is the most important issue at risk and one that is worthy of protection. It’s the ultimate prize for the century. The Chinese know it. We know it.

The Dollar has been very strong of late. It was weak on Friday however. The Fed is caught in a pickle. The Chinese Yuan and the Euro currency have been weak and are at the lowest levels in a year. A lot of it has to do with the fact that the United States is in much better shape than the rest of the world. China has many internal issues on top of trade; and Europe, with many problems, is starting to prepare for a hard Brexit, as the process keeps getting bumpier. Disruptive change is a global theme. Global norms are being reset. The Market continues to take this all in stride. By all accounts, the Market is crowning the US the winner in this trade war. But the Market’s patience with this threat is being tested. The headlines can be quite alarming. The actions have yet to be. In fact, the economic actions have been quite pragmatic. With all of these headlines this week, you probably thought the Market would get slaughtered. It sure didn’t. The difference is news versus noise. It’s not always easy to determine. But if the trade war moves from risk to event, i.e. noise to news, the Market will respond and not favorably.

Next week 177 companies report earnings. That is over 1/3 of the S&P 500. It will be the busiest week on the earnings calendar for Q2. The numbers are expected to be good. The reports will indeed be news. They will be Market moving too.

49 years ago today, Neil Armstrong and Buzz Aldrin made history becoming the first people to land on the moon. Now that was big news which made universal noise.

Have a great weekend. We’ll be back, dark and early on Monday.


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