TGI-Thursday! April 13, 2017

Things just got more complicated. As if they weren’t already complicated enough.  Geopolitics captured Market attention this week, with the primary focus around Syria and North Korea. The response from the White House has created an interesting and significant development on the global landscape. In a complete reversal from last year, relations are chilling with Russia while they seem to have thawed substantially with China. As the Presidential candidate, Donald Trump slammed the Chinese for unfair trade and called them currency manipulators. Conversely, he embraced the prospects of a stronger American-Russian relationship. Investigations are ongoing as to how close they were and aimed to be. This will no doubt play a major role in how the rest of the year unfolds.

Something important is happening.  Even though the headlines and consequences are highly concerning, the Market is taking everything in stride.  There has not been a massive selloff like one might have thought.  There has been tremendous movement under the surface, but the broad index as measured by the S&P has basically traded sideways near its all-time high.  The Stock Market was due for a breather.

However, the Market implications are significant with the diplomatic reversal between China and Russia.  China is much more important to the global economy than Russia.  China is the second largest economy behind the US.  China is our second largest trading partner, representing 15% of total US trade.  It’s about to replace Canada at the top.   Russia isn’t even in the top 25, with a struggling economy heavily tied to fossil fuel.  Improved relations with China will seemingly enhance our mutual economic activity, stimulate the global economy, cool the rising tensions on the Korean peninsula, and forge a path to a smoother and more prosperous Pacific Rim for this young, 21st century.

Make no mistake, things are far from certain for a warmer US-China alliance.  We agree to disagree on many issues, largely political and social.  But this new trend is definitely a positive development.  China has its own transition of power coming later in the year.  President Xi wants to ensure a strong political standing with a healthy economic outlook.  Its economy seems to be accelerating again.  He wants that to continue.  President Xi knows he’s on center stage and the world is watching.  It gets magnified even sharper when a leader is with the American President.  The US and China need each other.  Who needs who more is debatable and both countries are trying to strategically navigate that.

Despite the knee-jerk emotional investor reaction, which saw money flow into Bonds and Gold, the underlying health of this Market hasn’t really changed.  Trading has been very orderly.  The Credit Market is showing few signs of stress in the system.  Economic data continues to show growth both at home and overseas.  In fact, most International Markets behaved quite well this week.  They are much cheaper than our Market is and many are far from all-time highs.  Our thesis of a global catch-up is still playing out while our Market corrects.  If earnings season continues with more solid reports like we saw this week, this Market could reignite higher into Summer.

Enjoy the weekend.  The Market will be closed tomorrow in observance of Good Friday.  Our office will be closed too.  We’ll be back, dark and early on Monday.
Happy Easter!


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