Trade-War Fears Ignore Economic Growth & Recession Chatter

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  • Tariff Skirmishes Presage Trade Wars | Harley-Davidson Reacts
  • Recession Chatter: What Bond Market Yields Can (and Can’t) Tell Us
  • Looking Ahead: Economic Indicators

While trade-war fears roiled global investment markets in June, the facts that matter—strong first-quarter corporate earnings, still-low borrowing costs and solid growth throughout the U.S. economy—have thus far been able to overcome what is still primarily a war of words. When it comes to the all-important financial health of consumers, they remain confident and capable of propelling further growth as incomes continue to rise slowly—though it might not always feel that way.

Entering Friday, the Dow Jones Industrial Average has declined on 10 of its last 13 trading days. And with the broad stock market indices off their all-time highs reached in January, we appreciate that some investors are on edge. But we know that pullbacks are a normal part of investing. And even with the drops over the past five months, the broad indices today are not far from where they started 2018.

For the year through Thursday, the Dow Jones Industrial Average has declined 1.0%, while the broader S&P 500 has gained 2.6%. The MSCI EAFE index, a measure of developed international stock markets, is down 3.7%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.29% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has fallen 1.7% for the year.

Tariff Skirmishes Presage Trade Wars | Harley-Davidson Reacts

Trade-war uncertainty remains heightened as the Trump administration continues to waffle on how it plans to treat China. Meanwhile, the decision by iconic American company Harley-Davidson (ticker: HOG) to make more motorcycles overseas to avoid retaliatory tariffs in foreign markets puts the lie to the notion that trade wars are always good, and easy to win.

So far, trade-based concerns have only led to a pullback in the investment markets, not in our underlying economy, which remains on a slow-growth, not no-growth path. Final data for the first quarter of the year showed the economy expanding at a 2.0% pace and expectations are that the second quarter will show a pickup from there. With that data in hand, we see no hard evidence for the economy downshifting its course, let alone reversing into recession. This is not the same as saying neither could happen. At some point, they will happen—but not yet, despite some recession talk that was making the rounds this week. 

Recession Chatter: What Bond Market Yields Can (and Can’t) Tell Us

You may have seen the “yield curve” and “yield spread” returning to the headlines this week, stoking talk of a looming recession. As a refresher, the yield spread is the difference in yields between short-term and long-term bonds—the most commonly cited yield spread is the “2–10,” the difference in yields on 2-year and 10-year Treasurys. The 2–10 spread was just 0.32% at Thursday’s end.  

Why does this have some market-watchers on edge? Because an inverted yield curve, or a negative spread—when the shorter bond starts yielding more than the longer one—has presaged the last five recessions. The fact that yesterday’s final GDP figure was revised down from its initial 2.3% estimate helped stoke fears among those who see danger around every economic corner.

Three things we’d point out about the yield curve: First, on average, the last five recessions didn’t begin until more than 16 months after the yield curve inverted. Second, five recessions isn’t a particularly large sample size. There’s not a lot of data to go on. Maybe an inverted yield curve signals a recession. Maybe not. Finally, despite the headlines, the yield curve hasn’t actually inverted yet, and as the chart shows, head-fakes are not uncommon when it comes to this economic signal.

Source: Federal Reserve Bank of St. Louis.

Source: Federal Reserve Bank of St. Louis.

From our viewpoint, we’d pump the brakes on recession talk for the time being. Even if first-quarter growth was slower than initially calculated, we’re seeing estimates in the 3.5%–4.0% range for the second quarter. Plus, oil, confounding the experts, has surpassed $70 per barrel again. If the world was headed for recession, it is unlikely prices would be that high. Rather, oil’s ascent suggests demand indicative of continued global growth. 

We’ll continue to keep an eye on the yield curve as an indicator, along with a host of others, and will adjust our outlook accordingly. In the meantime, we are confident that our strategies can provide competitive risk and return characteristics throughout market cycles based on their objectives.

From decades of working with investors like you, we know that market declines often feel worse than they actually are given the pervasive and often negative headlines. We’d encourage you to take this opportunity to reaffirm your investment goals and ask yourself whether any worries are the result of near-term news or longer-term concerns. Does your portfolio still meet your risk-return objectives and comfort level? It’s always better to make that assessment when markets are relatively calm rather than during the depths of a bear market or at the peak of a bull market. We welcome the opportunity to help you make that determination.

Looking Ahead: Economic Indicators

Next week, markets (and Braver Capital’s offices) close at 1 p.m. Tuesday and remain shuttered Wednesday in observance of Independence Day. We’ll be back at our desks and at your service Thursday morning.

Despite the trade-shortened week, we’ll get a full picnic basket of economic indicators and market-moving data, including reads on manufacturing and the service sector, construction spending, car sales, minutes from the Federal Reserve meeting earlier this month and the June unemployment rate.

If you’d like to learn more about our tactical or fundamental investment strategies, please contact Steve Johnson at 844-587-7393 or We wish you an enjoyable Fourth of July holiday!

Please note: This update was prepared on Friday, June 29, 2018, 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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