Despite markets’ jitters over trade, signs of longer-term fear are few

Measures of confidence have held up and fund managers are optimistic.

  • By Akane Otani,
  • The Wall Street Journal
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Despite concerns about the trade impasse between the U.S. and China crimping global growth, many consumers and money managers have indicated they remain upbeat about the future.

Global markets have weathered some turbulence recently, including falling on Thursday and taking a sharp step backward earlier in May, after the U.S. and China hit each other with increased tariffs and ended their latest round of trade negotiations without a resolution. But the prices of relatively risky assets have mostly stabilized, and stocks are still not far off their all-time highs. The S&P 500 (.SPX) finished Wednesday just 3% below its record close.

Measures of confidence have also held up, suggesting worries about the U.S.-China trade fight have yet to dent investors’ outlook. Global fund managers’ expectations for future profits are at a nine-month high, according to a Bank of America survey. Gold prices, which tend to rise when investors are nervous about market volatility, have barely budged for the month.

There also have been few signs of fear in the bond market. The yield curve, or spread between shorter and longer-term Treasury yields, has inverted a couple of times this year, and it was inverted on Thursday as yields fell. But the spread between three-month and 10-year Treasury yields has failed to hold below zero for more than a few days at a time—suggesting investors still don’t have much conviction that the economy is headed toward a contraction just yet. A yield-curve inversion is often viewed as a bad omen because they have often preceded U.S. recessions.

“There are certainly a few signals of hairline cracks, but no big crevice anywhere that tells you we should run for the hills,” said Tom Stringfellow, president and chief investment officer of Frost Investment Advisors.

Mr. Stringfellow said he has viewed market dips as opportunities to scoop up discounted shares, not as the start of a prolonged downturn. “There’s nothing out there that suggests we’re close to recession,” he said.

Some surveys that have shown relatively high levels of confidence in the economy were conducted before the latest escalation in the U.S.-China trade fight, meaning future readings could be less rosy.

For instance, the University of Michigan said Friday that consumer confidence jumped in May to its highest level in 15 years. But Richard Curtin, the chief economist behind the school’s survey, said many of the responses came in before the U.S. and China’s trade talks ended without an agreement. Future drops in consumer confidence would be troubling, since that might weigh on consumer spending, one of the biggest drivers of growth for the U.S. economy.

Even so, analysts say the economic picture looks strong enough to justify the stock market’s relative calm throughout the U.S. and China’s latest skirmishes over trade.

“Assuming there are no major geopolitical breakdowns, one shouldn’t look for exceptional growth this year, but the odds of recession are reasonably low,” said John Vail, chief global strategist at Nikko Asset Management.

U.S. corporations have delivered better-than-expected earnings for the first three months of the year, easing the fears of those who had believed a dimmer global outlook might cause a sharp rollover in profits.

S&P 500 companies are on track to report earnings falling 0.5% in the first quarter from the year-earlier period. That is less robust than results from prior years but far better than the 4% decline that analysts expected in March, according to FactSet.

There have also been no signs that inflation is picking up at a pace that might force the Federal Reserve to rethink its current pause on rate increases.

Stocks tumbled last year when data began showing wage growth jumping, stoking fears that the Fed might have to accelerate its pace of rate increases. This year, inflation data have been largely underwhelming, allowing the Fed to put its rate increases on hold for the foreseeable future. The Fed’s preferred inflation gauge, the price index for personal-consumption expenditures, rose 1.5% in March from the year-earlier period, well below the central bank’s 2% target.

“I don’t see any strong argument…to move interest rates one way or the other,” Federal Reserve Bank of New York President John Williams said in a briefing Wednesday.

The fact that Fed officials have signaled a wait-and-see stance is supportive of stocks, analysts said, noting that much of the selling pressure in the final months of 2018 appeared to be fueled by fears about tighter monetary policy, as opposed to just trade. Higher interest rates can damp consumer and business spending, as well as make relatively risky assets such as stocks look less attractive compared to Treasurys.

The combination of easy monetary policy and solid growth is keeping many firms invested in stocks, even with lingering uncertainty over the U.S.-China trade negotiations.

BlackRock Inc. (BLK), citing a “slowing but still growing economy,” recommends investing in U.S. stocks over the next few months. UBS Wealth Management is holding on to overweight positions for stocks in emerging markets and Japan, reflecting bets that global growth will accelerate.

“The difference between now and the fourth quarter is that the Federal Reserve and other central banks are no longer your foe,” said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Co. “If you think that was the cause, as I do, of the fourth-quarter drawdown, more so than trade worries, it puts into context why we’re not so negative on the market.”

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