Pacific Funds, MARCH 2018
Informational commentary from Rothschild & Co Asset Management US Inc., the subadvisor to Pacific FundsSM
U.S. Equity Funds.
On Thursday, March 22, the Trump administration revealed plans to levy tariffs on $50–$60 billion of Chinese imports. President Trump also proposed restrictions on technology transfers and foreign acquisitions. The announcement was based on the belief that America’s trade deficit has grown “out of control,” according to the president.
How the Market Reacted
- The market reaction was negative, with major equity indexes down 2–3%.
- Nine out of 11 S&P 500® index sectors declined.
- All 30 stocks in the blue-chip Dow Jones Industrial Average® were negative.
- Going forward, median expectations suggest a target rate of 2.125% for 2018 (two additional hikes), 2.875% in 2019 (three additional hikes), 3.375% in 2020, and 2.875% for the longer run.
- The Cboe Volatility Index® (VIX®), a measure of expected swings in the S&P 500 index, rose 12% after shooting up more than 20% earlier in the day.
While U.S. officials have identified potential product categories that could be subject to tariffs, industry representatives are expected to have 15 days to comment. Some investors are concerned that these tariffs could lead to retaliatory actions from the Chinese government and possibly even other countries, potentially leading to a trade war.
Classic economic theory suggests that tariffs lead to inefficient trade, potentially hurting the economy and, therefore, job growth. On the other hand, there is the possibility that these policy changes achieve some short-term success in terms of protecting U.S. industry and spurring job growth in selected areas.
Other market observers are concerned that tariffs will prove inflationary; by design, tariffs raise prices on imported goods, and thus fiscal policy will be at odds with monetary policy (for example, the recent Federal Reserve rate hike designed to keep inflation under control).
Our Positioning Going Forward
It may be too early to determine the short-term and long-term effects on the overall economy, or for the stock market. Additionally, protectionism could create headwinds for the market as a whole. That said, our approach has consistently been to seek stocks with relatively attractive valuations and the potential to exceed expectations.
The Cboe Volatility Index (VIX) is a key measure of market expectations of near-term volatility conveyed by S&P 500 index stock-option prices.
The S&P 500 index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.
This publication is provided by Pacific Funds. Pacific Funds refers to Pacific Funds Series Trust. This commentary reflects the views of the portfolio managers at Rothschild & Co Asset Management US Inc. as of March 23, 2018, are based on current market conditions, and are subject to change without notice. These views represent the opinions of the portfolio managers and are presented for informational purposes only. These views should not be construed as investment advice, an endorsement of any security, mutual fund, sector, or index, the offer or sale of any investment, or to predict performance of any investment. Any forward-looking statements are not guaranteed. Sector names in the commentary are provided by the portfolio managers and could be different if provided by a third party.
All investing involves risk, including the possible loss of the principal amount invested.
Rothschild & Co Asset Management US Inc. is unaffiliated with Pacific Life Insurance Company (Pacific Life).
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Pacific Life Insurance Company is the administrator for Pacific Funds. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.