(New York)

What is the biggest threat to the bull market? Is it a recession, high valuations, interest rate volatility? In reality, the biggest threat to the bull market might be rearing its ugly head now—a trade war. Trade tensions between the US and China have skyrocketed again this week and it has investors worried that there could be a global slowdown in trading which would sink the economy. In fact, that is the point that some don’t understand—it is not just about whether the US and China close a deal in the near term, it is about how the trade tensions the US and China create percolate through the global economy. Astute market watchers will have noticed new data out of China shows that exports have dropped, a sign of potential weakening.

FINSUM: We think cooler heads will prevail and the US and China will get a deal done. Our expectation is that it will not be ground-breaking in scope, but that it will be enough so that both countries can claim victory and investors can happily put these tensions in the rear view mirror.

(New York)

One of the oldest tricks in the American tax book is seeing new life because of recent changes to the tax code. The process is referred to as upstream tax planning. Changes to the tax code mean that investors can take assets that have seen capital gains and transfer them to a trusted older relative with the understanding that they will be bequeathed. When that asset is re-inherited by the original donor it now has a new basis and can be sold into the market immediately with no taxes due despite the initial capital gains. One estate planner summarizes the changes, saying “People didn’t want to use up their estate tax exemption, but the whole paradigm has shifted because of this new high exemption amount … When they doubled the exemption, everyone thought they’d do away with the step-up in basis at death, but that didn’t happen. So this creates a huge opportunity for taxpayers”.

FINSUM: This is a very good loophole, but it does have a trust component where the donor needs to be confident the beneficiary will hold onto the asset!

(New York)

One of the behaviors that we like to follow to see the underlying health of markets is whether investors are “buying the dip”. Such behavior tends to indicate a fundamental belief in the direction of the market. Therefore, the recent drop off in investors doing so is worrying, but not for the reason that seems obvious. The lack of buy the dip is because until this week, the market had rarely fallen this year. That has meant buying behavior has been concentrated in the hands of bulls not afraid the buy into a rich market, which left many discount-seekers looking from the outside in. Now, many top analysts, and likely investors alongside them, have turned bearish.

FINSUM: The velocity of the market’s gains this year has been very impressive, but it naturally makes a lot of people worry it could come down just as fast.

(New York)

One of the most famous names in bonds, Jeffrey Gundlach, has just put out a bold statement. Gundlach thinks there is forthcoming trouble in markets and he thinks it is the Fed’s fault. Specifically, Gundlach thinks the bond market is set for a lot of volatility. “interest rates cannot maintain the low volatility they have maintained over the last eight years”. To be clear, Gundlach is not calling for a recession, but says “But I am starting to think it is much less of a lock that there won’t be a recession before the next recession”.

FINSUM: There are two conflicting ideologies here. The Fed thinks volatility is largely an extension of the economy and policy, both of which it feels it can control to an extent. Gundlach and many other investors think there are underlying forces in the economy and markets that can only be pacified for so long. We think they are both right to an extent.

(New York)

Stocks woke up to a volatility explosion this morning. President Trump made a surprise announcement that he was considering boosting tariffs on China. Specifically, the president threatened to raise tariffs to 25%. Beijing is reportedly infuriated. The comments come towards the end of what seemed to be a smooth negotiation with Beijing about a new trade package. Therefore, they riled markets to a major extent. Headline indexes shed a couple percent at peak (so far) and sectors like technology and industrials sold off sharply. The trade delegation from Beijing is still expected to attended a planned tariff meeting this week.

FINSUM: It is very hard to know how significant this is (whether Trump actually wants to do this), or whether this is just a negotiating tactic.