- Trade War Concerns
- Job Market Gains Strength
- Market Bottom—Nine Years On
- Looking Ahead
As he promised last week, yesterday President Trump signed an order to impose tariffs on imported steel and aluminum. Before the ink was dry, that news was upstaged by the announcement of an unprecedented event: The possibility of a face-to-face meeting between a sitting U.S. president and the leader of North Korea, Kim Jong-un.
While there remains much uncertainty about the enactment of the tariffs as well as the substance (let alone the probability) of a meeting with Kim in the next several months, both are significant and could have market repercussions.
With those two news events in full press, it would have been easy to overlook the fact that the fundamentals that matter most—earnings, economic data and interest rates—continue to reflect sustained domestic and global economic strength and growth.
For the year through Thursday, the Dow Jones Industrial Average has returned 1.2%, while the broader S&P 500 index has gained 2.8%. The MSCI EAFE index, a measure of developed international stock markets, is down 0.4%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.17% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has dropped 2.1% for the year.
Trade War Concerns
The steel and aluminum tariffs are slated to go into effect in 14 days. In contrast to the original promise that there would be no exceptions, Canada and Mexico were spared for now, on the assumption that this will create some leverage for the U.S. in the ongoing North American Free Trade Agreement (NAFTA) negotiations. The Trump directive also allows for flexibility with other allies. We believe these tariffs are unlikely to stall economic growth. Steel and aluminum, both imported and what we produce at home, account for less than 1% of the U.S. economy.
However, we are cognizant of the fact that such tariffs increase the possibility of a trade war. Whenever the issue of fair trade and tariffs is raised, we expect to hear saber-rattling from one aggrieved party or another. But at the end of the day, the global economy relies on mutual consumption of one another’s goods and services. So hammering out something that at least looks like fairer trade is a shared form of self-interest—and self-interest remains a great motivator for any dealmaker.
Job Market Gains Strength
We’ve said it before, and will say it again: As goes the U.S. consumer, so goes the U.S. economy. The latest numbers reaffirm that consumers are hard at work. The U.S. economy added 313,000 new jobs in February, far surpassing analysts’ expectations, while the headline unemployment rate held steady at 4.1% for the fifth consecutive month. Construction companies hired 61,000 new workers last month, the biggest increase in almost 11 years. Employment also increased at retailers, manufacturers and local governments—all signs of sustained economic growth.
The ingredients are present for higher wages: The economy is at “full employment,” employers say it is hard to find workers and initial unemployment claims are extremely low. Yet, wage growth has been lackluster. January’s 2.8% gain in average hourly earnings over the last year was the best since the end of the Great Recession. In February, that number slipped to 2.6%. It’s too soon to tell what the impact of the corporate tax reduction will have on wages. Companies have conspicuously announced tax-cut-related bonuses for employees—rewards that do not appear in wage growth data and are one-time shots in their workers’ arms. Real raises yielding sustainable wage growth is what will drive economic expansion further.
Market Bottom—Nine Years On
Yes, it has been nine years since stock markets bottomed on March 9, 2009. A common refrain about what’s to come is best summed up by a “macro strategist” quoted in today’s The Wall Street Journal: “It’s going to be a hard slog, certainly compared to the previous nine years.” The implication being that it’s been an easy nine years getting to this point.
We disagree wholeheartedly. It’s been a long bull market, but it hasn’t been an easy one. First off, who was ready, with cash in hand, to back up the truck and start buying when the markets hit their nadir nine years ago? And since then… remember when it looked like Greece was going to capsize the European Union? Or maybe Brexit would do the same? Oil, which was near $110 a barrel, cratered to less than $30—did investors raise concerns? You betcha. How about when interest rates dropped to record lows—that couldn’t be good as it implied lots of easy money (and fear that future interest-rate hikes would derail the recovery). How about the decline in health care stocks? Obamacare? The rise and fall of cryptocurrency?
We could go on and on about the roadblocks, bumps in the road and even minor fender-benders that we have endured together over the last nine years, but you get the point. We’ll have to face a whole new set of challenges and hurdles in the years to come.
In Chinese culture, the number 9 is considered one of the four auspicious digits and is a homophone (has the same sound) for the word for “long-lasting.” It is also a homophone for the words meaning “to have enough” and “to save.”
How fitting. And how auspicious.
Next week brings reads on small business confidence, inflation, retail sales, regional manufacturing gauges, homebuilders’ confidence and new construction, and the “JOLTS” report on job openings (wherein the number of people leaving their current job indicates their confidence and ability to find another one).
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Please note: This update was prepared on Friday, March 9, 2018, prior to the market’s close.
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