Market watchers will be focused on which sectors lead the market higher—will they be the cyclical-related sectors or the more defensive ones? This sector leadership exemplifies the tone of investor thinking as to whether we are in a slowdown or expansionary environment.
Trade war concerns continue to cause intense market jitters. President Trump issued an executive order at the end of March that could impose tariffs on up to $60 billion of imports from China. This is in addition to the steel and aluminum tariffs introduced, but with important exceptions. The president did stress that there will be negotiations between the U.S. and our trading partners, but the overall effect must be a level playing field.
Following the March FOMC meeting, Chairman Powell was asked about the effect on the economy from tariffs and a possible trade war. He replied that conversations with FOMC members and business leaders suggested that trade policy has become a concern for growth going forward. The market continues to sort through the headlines and comments from the administration to determine which sectors and specific companies are best positioned for different scenarios.
The new regime is a return, in many ways, to a normal market. Normal markets require catalysts to climb higher. The second quarter—which statistically is not the most hospitable in terms of returns—should enjoy solid growth here and abroad; solid, if not stellar, earnings; the fiscal stimulus beginning to filter into the real economy; and a Federal Reserve that wants to maintain the “middle ground” to ensure a smooth transition that avoids jeopardizing the economic recovery.
Quincy Krosby is chief market strategist at Prudential Financial.