The title of the first quarterly letter for 2018 ponders the obvious question about the financial markets. Indeed, the long lasting “honeymoon” between President Trump and the U.S. equity markets seems to be over, with the Dow Jones Index down roughly 12% between the high on January 26th and the recent low on April 2nd. What appeared to be a never ending state of mutual fondness, ended up with an extremely volatile reality check! The most used index to measure volatility in the equity markets, the VIX, rose a stunning 464% between the low and high levels of the year, on January 4th and February 6th, respectively.

During the first three months of the year, the S&P 500 Index was down 0.76%; the Dow Jones Industrial Average declined 1.96%; the NASDAQ dropped 2.59%; the iShares iBoxx High Grade Corporate Bond Exchange Traded Fund (ETF ticker: LQD) was down 2.89%, while its high yield version, the largest “junk-bond” ETF by assets (ticker: HYG), returned a negative 1.05%. Given the very high level of domestic equities, a long anticipated correction finally manifested itself. The principal factor contributing to the end of the profitable relationship between the Trump Administration and the domestic markets was the risk of a serious and prolonged international trade war. It is unclear whether or not the current approach is reflective of negotiating tactics. What is clear is that if this approach becomes the modus operandi in future trade negotiations, we can expect heightened volatility to impact a broad range of other asset classes.

Given the considerable concern about the prospect for trade wars, it is interesting to take note of some historical facts. As pointed out in a recent article in Barron’s, the United States has run a current account deficit since 1992; yet it is commonly argued that economic prosperity is almost always positively correlated to a surplus in current accounts. Furthermore, China has seen great prosperity in recent decades, yet according to Barron’s, its net exports accounted for only 2% of their GDP! Hence, one may conclude that trade surplus is not necessarily the main factor in that nation’s economic growth. It is our belief that both nations are eagerly looking forward to a productive roundtable of discussions. What is unfolding in the media is likely part of a tactical strategy to provide ammunition to each of the parties ahead of more formal negotiations. The one area where the Administration is likely to play hardball is on the topic of intellectual property rights. We do not believe China has any leverage on this front. The inability to seriously enforce intellectual property rights, in our opinion is likely to cause the United States negotiators to take a much tougher stance against their Chinese counterparts.

As we enter the second quarter, we want to be mindful of a major risk factor that could prove to be a significant market mover, namely the ongoing Mueller investigation. Although to date, the publicly known information has not provided any evidence of collusion, the “heat” has been turned up with recent raids on President Trump’s personal attorney, Michael Cohen.

In the international sovereign debt marketplace, there were no major developments of substance. Although the markets retreated from their highs, the price decline was not sufficient to warrant additional commitments to this sector. We continue to monitor economic and political developments throughout the world in order to add to our current holdings or identify new, attractive opportunities. Stay tuned!!

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