Economics and Facts, Not Trade-War Fears
- Tariff Talk
- New Fed Chief, Same Fed
- High Prices Can’t Slow Hot Housing Market
- Looking Ahead
President Trump’s unilateral imposition of tariffs on Chinese imports triggered a fear-based sell-off in U.S. stocks on Thursday—call it the “Tariff Tantrum.” With the Dow falling more than 700 points, the headlines were, as you’d expect, dramatic. But as we’ve pointed out time and again, a Dow point today isn’t the same as a Dow point of the past. Wall Street’s best-known index declined 2.9% on Thursday and the S&P 500 index fell 2.5%. That’s not nothing, but it’s also not calamitous. China responded with a set of moderate and retaliatory tariffs, and Asian stock markets followed the U.S. lower on Friday.
As we try to separate tariff-risk facts from fear-based assumptions, the greatest investment risk is overreacting to what we don’t yet actually know. Our longstanding investment discipline has withstood the test of far more trying times, giving us the confidence that remaining calm through this challenging moment will ultimately be the best solution.
For the year through Thursday, the Dow Jones Industrial Average is down 2.6%, while the broader S&P 500 index has dropped 0.7%. The MSCI EAFE index, a measure of developed international stock markets, has declined 1.3%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.18% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market is down 2.0% for the year.
While it is in no country’s self-interest to engage in an actual, sustained trade war, it may behoove countries to act like that’s what they’re willing to do in order to achieve greater trading parity. The trouble is that any mention of tariffs puts trade-war talk on the table, something likely to keep the markets more, not less, volatile.
Despite the president’s claim that trade wars are “easy to win,” we see them as a net negative on a global scale and that they end with “relative winners,” but no absolute victors. As with most wars, broad losses can overwhelm narrow gains. No one can say with certainty who will be among the beneficiaries and also-rans this time around. The U.S. economy is dynamic, robust, innovative and resilient. We like to think we’ll be among those who come out on top should tariffs start a downward spiral into trade war. But what about China? Or Japan? Or Germany? These are hard questions to answer with any degree of certainty.
So, rather than bet that the tide shifts in favor of a single country, we stick with our disciplined, unemotional approach to investing.
New Fed Chief, Same Fed
Sometimes the more things change, the more they stay the same. And that’s what March’s two-day Federal Reserve meeting, led by newly installed Chair Jerome Powell, yielded. In a well-telegraphed move, the Fed raised the short-term fed funds rate by 0.25% to a range of 1.50% to 1.75%—the sixth interest-rate hike since policymakers began to unwind the Great Recession stimulus plan in December 2015.
Powell demonstrated that, for now, he will not deviate from the data-driven course set by his predecessor, Janet Yellen. In a post-meeting press conference, he provided a steady, unwavering outlook that emphasized the stability of our expansion, the vigilance of the Fed and its intent to stick to the current forecast of two more rate hikes in 2018.
Unlike those he succeeded, Powell’s press conference was devoid of economic predictions and theory and focused on what is happening in the economy. If this press conference was any indication, Powell will not be beholden to economic philosophy, but rather to hard data.
Currently, leading economic indicators reflect robust economic activity. The Fed is vigilant, capable and proven in terms of its mandate to support maximum employment while maintaining stable prices. That is the foundation for building more gains, and, so far, it shows no cracks. So, despite the rhetorical whirlwinds, we remain optimistic that even if near-term stock market losses mount, year-end gains will surmount.
High Prices Can’t Slow Hot Housing Market
Inflation is defined as too many dollars chasing a scarcity of goods. That’s what’s happening in the housing market. Sales of previously owned homes—which account for 85% to 90% of all homes purchased—rose 3.0% in February from the previous month and were up 1.1% from the same time last year. Buyers bought more homes even as prices rose 5.9% over that 12-month period. That buying took place in the face of average 30-year fixed mortgage rates of 4.33%, which, while still historically low, reached their highest point since April 2014. Inventory of available houses, the scant goods homebuyers are chasing, was 8.1% lower last month than in February 2017.
In other words, with plenty of people still searching for new homes and relatively fewer homes on the market, it is a great environment to be a seller and a challenging one if you’re a buyer.
A week from today, Braver Capital’ offices and the markets will be closed in observance of Good Friday. (Look for this weekly round-up in your inbox Thursday afternoon.) Despite a trade-shortened week, we’ll be getting reads on consumer confidence and sentiment, home prices and pending home sales, inflation, consumer income, spending and savings and a final revision to fourth-quarter economic growth.
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Please note: This update was prepared on Friday, March 23, 2018, prior to the market’s close.
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