Market Moves

Traders returning from the long U.S. holiday weekend reopened the markets at lower price levels compared to Friday's close. However, stocks remained in a relatively tight trading range, with the S&P 500 closing only one-half percent lower. Large-cap stocks fared slightly better than small-cap stocks, reflecting investor preference for less risky assets.

This preference can be seen in a rather stark comparison between the two retailing giants Amazon.com, Inc. (AMZN) and Walmart Inc. (WMT). Among the price trends of companies represented on the chart below, notice that the two retailing companies showed a decidedly different price trajectory over the summer. It appears that Walmart shares are considered by investors to be a safer investment. There is a reason for that: Walmart pays a predictable dividend, similar to The Proctor & Gamble Company (PG), NextEra Energy, Inc. (NEE), McDonald's Corporation (MCD), and Duke Energy Corporation (DUK).

When investors are nervous about prospects in the market, high-dividend stocks seem to be preferred over growth stocks. Such growth stocks tend to attract investors chiefly based on growth of the share price. Though Amazon's business ventures are doing quite well, investors see Amazon as a growth stock. Perhaps this is the primary factor pushing investors to funnel money out of Amazon shares and pour money into Walmart shares.

Chart showing performance of stocks investors consider safe ports in storm

Interplay between Dollar and Gold Echoes Market Stress

Nervous investors continue to look for places to push their money away from the risk they perceive in growth stocks. In addition to the fact that the Russell 2000 Index continues to underperform other indexes, an interesting price pattern has emerged in the relationship between the price of gold and the U.S. dollar Index

When you consider that gold is more frequently priced in U.S. dollars, you realize that the mathematical relationship between the U.S. Dollar Index and the price of gold would naturally be an inverse relationship. After all, if a dollar is less valuable then it used to be, then it takes more dollars to buy an ounce of gold. So naturally you'd expect the general market price action to show an inverse relationship on a price chart comparing the two assets.

But since the pattern seems to have changed recently so as to show a positively correlated price trend, analysts might consider this to be evidence of stressed-out investors. In fact, this dynamic is likely to be a further reflection of the nervousness that investors feel as they accept higher prices for both assets in their pursuit of ways to hedge their investments (see chart below).

Chart showing rise in gold and U.S. dollar

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Can the Markets Predict the Trade War Outcome?

Talk of the latest salvo in the U.S. China trade war is common in headlines nowadays. If the market trades lower on any given day, it is almost certain to be attributed to trade war news of any kind. But tariff and trade-war talk has been going on for quite a while now. It isn't something new. Consequently, it may be appropriate to question whether such activity has had any discernible impact. The chart below may prove informative.

The first major news about the implementation of tariffs and a resulting trade war was published on or around Jan. 24, 2018, a few months more than a year after the 2016 election. The news centered on newly announced tariffs on washing machines and solar panels. These items had significant impact not only on Chinese manufacturers but on South Korean companies as well.

The chart below compares the iShares Large-Cap China ETF (FXI), which tracks companies such as Tencent Holdings Limited (TCEHY) and Industrial and Commercial Bank of China Limited (1398.HK) in China, and the iShares MSCI South Korea Capped ETF (EWY), an ETF that tracks large companies such as Samsung Electronics Co. (SSNLF) and Hyundai Motors Company (HYMTF) in South Korea, with the SPDR S&P 500 ETF (SPY) to represent the S&P 500. 

The price pattern is unmistakable, but because so many other factors are involved, it is unclear whether this chart can be reduced to an investor referendum on the predicted outcome of the trade war. Regardless, the impact of the trade war on the markets cannot be understated over the past 18 months.

Chart showing performance of stocks affected by trade war

The Bottom Line

U.S. stock indexes continue to show nervousness, with investors demonstrating a preference for dividend-paying stocks over traditional growth stocks. Gold prices also show the impact of stressed investors who are willing to pay a premium for the metal. The protection investors perceive in holding gold is apparent, as gold prices are on the rise even though the U.S. dollar is trending higher in value also. It's no surprise where the market worries are coming from as trade war headlines dominate each news cycle.

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