August 2018 - Is a Trade War to be Feared?
- Effects of a trade war.
- The American economy is thriving.
Since January, we have witnessed a tug of war between the Bulls and Bears. There have been times where the bears seem to be taking over with a worried story, and times where the good corporate earnings create an enthusiastic cadence.
For the most part, July has been a month of the worries being set aside. The worries took the second stage with economic growth and corporate profit growth creating much more hope. I am actually Pro Growth, yet I am also Pro Reality. Here is where we are at.
Worries Always Make the Headlines
One of the worries a lot of clients ask me about is the trade war with China and I understand why. The financial and political news media are obsessed with it. However, I am less so.
China and the U.S. have too much to lose by having a real trade war and what we see is mostly posturing. We are economically dependent on each other in many ways. For the first five months of 2018, the trade deficit with China was a record $152.2 billion. Our exports to China dwarf what we import from them.
China has more to lose than we do, but neither country wants a trade war. Both Presidents should come to an agreement in time. I do believe the squabble will be resolved and worked out.
President Trump and the European Commission President, Jean-Claude Juncker agreed to work toward eliminating tariffs and barriers to trade. This is a positive with our trading partners in Europe and might put pressure on China to resolve the dispute. Let's hope it is sooner rather than later.
- A trade war will hurt everyone. Some countries will be hit worse than others for sure. Foreign trade is a smaller share of the U.S. economy than its trading partners, so we are in a good negotiating position. Our economy is outperforming most major countries, so if we are ever to solve the fair trade issue, this seems to be a good time. When we solve the issue, this market should like it.
- Federal Chairman, Jerome Powell offered up his semi-annual testimony in July. Most of his remarks were optimistic in regards to our economy:
- “…robust conditions in the labor market”
- “…solid pace of (economic) growth”
- “…investment by businesses has continued to grow at a healthy rate”
- “The job market will remain strong and inflation will stay near 2% over the next several years.”
- Showing he is not overly concerned, Jerome Powell also commented on the much talked about yield curve worry. He mentioned what mattered most was a neutral interest rate. This meant that it is good to have interest rates that are neither stimulating nor restricting growth.
It is interesting to note that the last five recessions we have had followed an inverted yield curve. History shows that we have had such recessions 21 months after the 2-year yield exceeded the 10-year yield the stocks continued to climb nearly 17 months after the yield inverted.
- The unemployment rate has come down little by little over the past several years. We are at or near full employment. This is encouraging.
- During the first quarter of 2018, the S&P 500 earnings surged 26% versus one year ago. The second quarter results look good. With 53% of the companies in the S&P 500 reporting, a majority of companies have reported positive earnings per share positive surprises.
Corporate earnings in 2019 will likely be more normal. The American economy is thriving yet approaching full capacity. Our economy should grow, but earnings comparisons will get harder as the subsequent quarters approach.
August sometimes can be the dog days of summer for the markets. It is generally one of my least favorite months. Many traders in New York and Europe escape and go on vacation. That's good for them, but it dries up trading volume and can lead to more volatility at times. August of 2017 was pretty good, so we'll see what happens to the economy this year.
Hope you have a wonderful end of summer. It is a great honor in helping you meet all your financial goals. Please give us a call with any immediate questions. Hope to see you soon.