Trade tensions between the U.S. and China have escalated in the last month, but negotiation still remains the main path forward. Despite threats of additional tariffs, the tariffs in place remain manageable, and there’s plenty of time before any new tariffs under discussion would kick in. The main U.S. advantages in the trade dispute are broad recognition of the need for Chinese trade reforms and a large goods trade deficit.
Both surveys and hard data have been signaling that businesses are increasing capital expenditures. Capex expansions may receive continued support from lower tax rates and repatriated profits. Incentives in the new tax law and strong business confidence may help encourage businesses to focus on capex to increase efficiency and improve competitiveness.
We have maintained our positive stock market outlook in part because we expect resolution with China on trade, and only minimal economic damage to the U.S. and abroad. We acknowledge that trade tensions may escalate further, potentially leading to additional market volatility. When volatility occurs, we plan to reinforce our tactical and strategic positioning in portfolios, including favoring stocks over bonds, small caps over large, value over growth, cyclicals over defensives, and U.S. and emerging markets over developed international.
Capital spending is picking up, which we believe should benefit the industrials and technology sectors. Industrial companies have not benefited from the strong manufacturing environment this year, putting the sector in position to potentially play catch-up. We expect technology to get its fair share of capital spending as companies seek to enhance productivity. Escalating trade tensions are a key risk to both sectors.