The U.S. Equity Markets Rebound After Monday’s Sell Off
The U.S. equity markets started the week with a strong sell off due to China’s retaliation to President Trump’s tweet last week, which said the U.S. would put 10% tariffs on $300 billion of additional imports from China. Out of the $550 billion the U.S. imports from China, there is currently a 25% tariff on $250 billion.
In retaliation, the Chinese government allowed their currency to devalue against the U.S. dollar. The yuan has not traded at these levels against the greenback since 2008. This was an attempt by the Chinese government to make their exports more affordable, which ultimately would help alleviate the burden of tariffs.
The markets took both the tweet and devaluation of the yuan as a sign that things were escalating quickly. That caused the major indexes to sell off on Monday. The Dow plunged 760 points in the worst trading day of 2019 and caused some concern among investors. However, the markets recovered and as of Thursday’s close, the S&P 500 is now up .2% for the week.
On another note, the S&P 500 yield is now higher than the yield on the U.S. 10-year Treasury bond. This is positive news for equity investors because it makes it more attractive to own stocks than bonds. In other words, stock owners are now receiving a higher yield and have the potential for appreciation in the long run. Whereas bonds have a lower yield and potential for appreciation is minimal.
We do not believe owning stocks will be a smooth ride for investors and therefore we would not be surprised to see a pullback of 5-10% before the year is over. In any healthy market, we expect to see pullbacks, especially after such a strong return we’ve had this year.
We strongly believe that markets overreact in the short run and the best path is the one that is grounded on a sound financial plan and investment management strategy. Please reach out to your Surevest financial advisor with any questions.