What's on Tap: Stocks Climb Wall of Tariff and Monetary Policy Uncertainty

  • One Month Doesn't Make a Trend

  • Traders Want Rate Cuts, Fed Still Wait-and-See

  • An Upside to Tariffs? 

  • Financial Planning Friday: Life Insurance Made Simple

  • Looking Ahead

Disappointing jobs numbers and an approaching deadline for Mexican import tariffs couldn’t disrupt a stock market rebound this week. Through Thursday’s close, the S&P 500 index and the Dow Jones Industrial Average were on track for their best weekly performance in six months—both continue to gain ground as we write this.

For the year through Thursday, the Dow and the broader S&P 500 have returned 11.5% and 14.5%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is up 9.8%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index sat at 2.66%, down from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 4.9% for the year.

One Month Doesn’t Make a Trend

New data from the Labor Department showed the U.S. economy added 75,000 jobs in May, significantly lower than analysts’ expectations for 180,000 new jobs. Further, previous months’ estimates were revised lower, with the Labor Department now calculating that 75,000 fewer jobs were created in March and April.

Wages were up 3.1% from a year earlier, also falling below analyst estimates, while the U.S. unemployment rate held steady at 3.6%—the lowest it’s been in 50 years. A broader measure of unemployment fell, however, signaling continuing tight conditions—a good thing for job seekers and those looking for raises.

The Labor Department’s numbers suggest that an earlier report from payroll firm ADP might not have been an anomaly. ADP’s private sector jobs data, released Wednesday, calculated that 27,000 new jobs were added in May—a nine-year low in terms of job growth.

Many pundits had already leapt upon that number as proof that economic growth is dead in the water and that recesion is looming nearer. Our outlook is not so dismal.

Why are we holding off on recession predictions? Simple: One jobs report doesn’t make a trend for the employment outlook or the overall economy. This week offered a bevy of other data that was much more positive, reflecting an economy that not only remains afloat but is continuing to make forward progress. We’ve said it before, but it’s a mantra that should soothe: Based on the overall data, this is still a slow-growth, not a no-growth economy.

We are not immune to recession. By both historical measures and the law of averages, we know we are now closer to a contraction than we were last month or last year. Hence, we expect to see more recession predictions in the coming days. But an increase in gloomy prognostications doesn’t better the odds of the pundits getting it right.  

Traders Want Rate Cuts, Fed Still Wait-and-See

Do the new jobs numbers make an interest-rate cut from the Federal Reserve more likely? Traders certainly seemed to think so: Bond prices rose and Treasury yields plunged to their lowest levels since 2017 immediately following the news.

The Fed has been more measured, though. Chairman Jerome Powell offered his thoughts this week, and he did not seem swayed by the chorus of those calling for rate cuts when the Fed meets on June 18 and 19. Instead, he reminded us that the central bank is vigilant, monitoring all the known crosscurrents that threaten our slow-growth economy, but that policymakers are not going to act ahead of the data.

While a rate cut will be more likely than a rate hike later this year if the economy slows or tariff turmoil grinds higher, we don’t expect to see a policy change this month.

An Upside to Tariffs?

For the past several weeks, in this email and elsewhere, any talk about the markets has revolved around trade, tariffs and Trump. First it was the issues around Brexit and trade within and outside of the European Union, then it was China and a ratcheting up of tariffs on a slew of goods. Now, it’s Mexico. That’s not to say that either Brexit or China are solved—far from it. But the tariffs on Mexican exports to the U.S. are the first to run into resistance from within the Republican party—a new wrinkle in the tariff wars.

 This increased talk of tariffs has prompted some pundits to reconsider the case for them. While the consensus among mainstream economists is fairly simple—free trade good, tariffs bad—there have been some counterarguments making the rounds.

Some analysts suggest that if we put up enough barriers to trade with our partners, the always-innovative U.S. businessperson will find a way to make up for it with domestic production. That’s the lesson they’re taking from the 1970s oil embargo. Afterwards, we became more efficient in our energy use and saw the development of the fracking industry, both of which reduced dependence on foreign suppliers.

Of course, the immediate pain of those oil embargoes was acute—double-digit inflation and long lines at the gas pump—while the benefits were reaped decades down the road. (Never mind that much of the research on fracking technology was funded by the government.)

 What isn’t being discussed is what happens when China and Mexico replace U.S. demand for their goods and services elsewhere, thus growing their economic power without the U.S. as a partner. China in particular is quickly becoming a challenger to the U.S. as a world leader. Photos like the recent one of Chairman-for-Life Xi doing a walk-and-talk with Russian President Vladimir Putin are cause for worry. A stronger union between the two could be troublesome for the U.S.

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Financial Planning Friday: Life Insurance Made Simple

What separates successful investors from the rest of the pack? Knowing how to anticipate and manage risk. It’s a skill that’s even more important when it comes to securing your family’s future. That’s why life insurance can be a cornerstone of any financial plan. Here’s a quick read on how to determine how much insurance you may need and the type you should buy. 

How Much You Need

The purpose of life insurance is to replace the family breadwinner’s earning power if they pass away unexpectedly. The amount of coverage you should have depends on your family’s needs as well as your potential lifetime earnings. (Note that we discussed disability insurance, which protects your income if illness or injury prevents you from working, in our May 17, 2019 weekly email.)

The aptly coined acronym LIFE—liabilities, income replacement, final expenses and education costs—is a good guide for estimating how much life insurance you need. 

  • Liabilities are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.).

  • Income replacement can be trickier. A comprehensive estimate anticipates variations in income over time—in some professions these may be steep. (A surgical resident might be expecting her income to climb sharply in a few years, for example.) But a useful rule of thumb is to multiply your current income by the number of working years you’d like your insurance to cover—10 years is a good starting point.

  • Final expenses include funeral costs and the legal fees necessary to dispose of your estate. A standard estimate, believe it or not, is $50,000. 

  • Education costs include college tuition and/or school fees if your children are privately educated. Several factors go into making a precise estimate (current tuition, expected tuition increases, your child’s age and how much you plan to pay for). Fortunately, there are online calculators that can run the numbers for you. We like the ones from The College Board and Vanguard.

Adding up the four LIFE numbers can help you determine the amount of life insurance you should get to ensure that your beneficiaries won’t have any financial worries.

What Type to Get

Figuring out the size of the policy you need will help determine the type of insurance to purchase. If you need more than $1 million in life insurance coverage, “term life” insurance is generally the most cost-effective option. Term life means that the policy is only in place for a set period—usually 10, 20, or 30 years. When that term comes to an end, the policy expires, and you’ll have to purchase a new policy (or renew your old one) to continue the coverage.

“Whole life” or “permanent” policies have no expiration date. The policy runs from the moment you buy it until your death, and the amount your beneficiaries will receive is guaranteed. Those two conditions can buy considerable peace of mind—but it comes with a hefty price tag. Premiums for whole life policies can be 10 times as much as term life for the same individual.

Ultimately, the kind of life insurance you purchase should match your needs and situation. Since these will change over time, it’s a good idea to review your life (and disability, if you have it) insurance policies yearly.  

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Looking Ahead

Next week, we’ll see reports on small-business confidence, inflation, retail sales and consumer sentiment. A word of warning: Such report-light weeks tend to give volatility and event-driven “news” the upper hand when it comes to the market’s day-to-day moves.

If you’d like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note : This update was prepared on Friday, June 7, 2019, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

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