INSIGHTS FROM FIRST FOUNDATION

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The Week Ahead – Essentials of Negotiation

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

One of my favorite classes in college was “Business 144: Negotiation Fundamentals”. In fact, I still have the textbook in my home library, “Essentials of Negotiation” by Lewicki, Saunders, Barry, and Minton. While we all have been negotiating all of our lives, from “If I finish my vegetables, can I have dessert?” to “if I finish my homework, can I go to Mike’s house and play?”, this class actively broke down the strategy, framing, and planning of negotiating. I sure wish I took that class while in elementary school, I would have made off with more chocolate cake! One key chapter was entirely focused on global negotiation,  specifically breaking out the “American negotiating style” versus other regions. One researcher, John Graham, concluded that “in American negotiations, higher profits are achieved by making opponents feel uncomfortable, while in Japanese negotiations, higher profits are associated with making opponents feel comfortable”. Another researcher noted that within American society, we value the individual: where independence, assertiveness, and speed are rewarded. Group-orientated societies, like the Chinese, reward those that fit in, are loyal to the group, and share consensus views. No wonder the trade negotiations have been taking so long with so much drama!

A threat delivered via tweet. A sell off. A rally. All said and done, the S&P 500 declined 2.2% for the week while the 10-year U.S. Treasury declined 0.07% to 2.46%. The VIX shot up to 23.38 from 13 and yet ended the week only at 16. Watching intraday trading was painful as the risk-off trade took hold on a daily basis, yet each intraday low was met with renewed buying interest. While the tweet can be seen as the driver of last week’s volatility, it is normal to see modest sell-offs of 3-5% every 2-3 months. The recent 4½ month run that the market has seen has been a very long one without one (91st percentile on duration). With capital still looking to be deployed, it seems that the excess isn’t within the system yet. Another interesting tidbit, U.S. equities saw outflows to the tune of $14 billion last week while emerging markets, mostly focused in Asia, saw outflows of only $1.3 billion. In our CIO’s latest piece, Early Bloom , Louis Abel notes that international and emerging market now represent 75% of global GDP and 45% of the weighting within the MSCI All-Country World Index, yet the average U.S. investor only has about 22% of their equity allocation invested with international and emerging market equities.

The week ahead will be dominated by housing and manufacturing (and of course trade talks). While domestic manufacturing has declined as a share of GDP since peaking in the 1950’s, it actually leads all sectors in terms of contribution to GDP volatility, accounting for over 30% of the volatility in quarterly GDP growth from the second quarter of 2005 to the fourth quarter of 2018. In the ISM’s semi-annual survey, 59% of manufacturers reporting that tariffs have led to an increase in the price of goods produced and one-third of respondents specifically noting tariffs causing disruptions to supply chains. With the tariffs on $200 billion Chinese goods now moving to 25% from 10%, expect even more disruption.

Data deck for May 11-May 17:

Date

Indicator

Period

May 14

Import Price Index

April

May 15

NAHB Housing Market Index

May

May 15

Advance Retail Sales

April

May 15

Empire Manufacturing Index

May

May 15

Industrial Production

April

May 16

Initial Jobless Claims

----

May 16

Philadelphia Fed Manufacturing

May

May 16

Housing Starts

April

May 17

University of Michigan Sentiment

May

 
    

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Andrew Chan, CAIA, Portfolio Strategist
About the Author
Andrew Chan, CAIA, Portfolio Strategist
Mr. Chan serves on the investment team and is responsible for conducting investment manager research and portfolio construction. As a member of the investment committee, he provides market commentary and investment insights. Mr. Chan’s responsibilities include overseeing client portfolios, calculating risk metrics, conducting the rebalancing of client portfolios, and evaluating the selection of new investment managers. With over 10 years of wealth management experience, Mr. Chan has played key roles across various aspects of investment and wealth management. Prior to joining First Foundation Advisors, Mr. Chan was most recently a portfolio manager at U.S. Trust where, in addition to his daily responsibilities, he served on numerous internal committees including the investment manager committee, the portfolio model committee, and the strategic technology committee. He also served on the in-house strategic consultant committee reporting directly to the President of U.S. Trust. Mr. Chan is a graduate of the Wharton School Executive Program on Investment Management and holds a Bachelor of Arts degree in Business Administration from the University of California, Riverside. He is a Chartered Alternative Investment Analyst (CAIA). Mr. Chan serves on the executive board for CAIA Los Angeles and is the Interim President for the association. Read more
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