“May you live in interesting times”, while often referred to as a Chinese curse, it doesn’t appear an authentic Chinese saying. Regardless of the source, we may very well live in interesting times. Then again, maybe it is always interesting. Friends are foes, foes are friends, trade deals are on, trade deals are off. The big headline drivers in the capital markets are the three T’s. President (T)rump, (T)ariffs, and (T)rade. Perhaps the faux-Chinese saying is a good summary for the state of world affairs and the main event showdown between the US and China.
There are generally two types of stimulus that can be delivered to the economy. Monetary stimulus which typically comes from the Fed and fiscal stimulus from the government. As the economy has continued to expand, the Fed has been trying to unwind monetary stimulus by raising interest rates. Fiscal stimulus can come in the form of increased government spending or tax cuts. The Tax Cut and Jobs Act gave a big shot of the latter. The tax cuts and a firm economy have allowed companies to enjoy record profits, but we are not really pushing the equity markets higher. We are basically treading water at these levels. The tax cuts are the wind pushing our sails, while the three T’s the currents pushing markets back. Without the tax cuts, we might be in some real stormy waters. We have been seesawing back and forth between the tailwinds and strong currents depending on where we are in negotiations. Some days up, some down, range bound with no significant real direction.
Most client accounts are positive for the year with more aggressive models faring better than those with more bonds. The steady rate increases from the Fed have held back bond returns. The unemployment rate recently went up and this is good news for bondholders. What? Higher unemployment is good news? In this case, we had more job seekers return to the employment market, so unemployment increased by 0.2% to 4.0% in June. This might give the Fed the wiggle room they need to slow the pace of rate increases. Bonds provide ballast in a portfolio, so we need them, but they generally decline in value as interest rates increase. Log into our client portal to see the specific returns for your portfolios (https://areniteadvisory.com).
As for the three T’s, the markets are learning to deal if President Trump’s non-traditional political style by not overreacting too far one way or another as the pendulum swings from day to day. Tariffs have gotten the attention of the capital markets, but they are not too big a deal thus far. The first $34 billion tariff imposed a 25% duty on industrial components is expected to reduce GDP by 0.06%, so less than a tenth of a percent. It is a big import duty, but not a big GDP impact. Tariffs are the low hanging negotiating fruit. The numbers seem big, but the impact is not too large. The US and China are exchanging volleys like for like, with China matching each US move. The important thing is trade! While tariffs can be a pain, all-out trade restrictions and embargos would raise alarm bells for the domestic and global economy. It is all connected. Tariffs might be akin to rough seas or a passing storm. Trade embargos or the ceasing of goods and services between economies can be like running the ship aground. Tariffs seem to be tools for change and negotiation in the Trump administration, but short of an all-out trade war, despite news headlines. The market impacts have been muted thus far as we have the tax cuts holding the ship and profits together for now.
It is all certainly interesting regardless of your political views, though each side may use different verbs to describe it. We stand at the helm ready to navigate whatever waters lie ahead. We undoubtedly can’t control trade tensions, but very much can help with financial decisions within your control. We appreciate being your trusted partner in life and take immense value in serving you.
Daniel D. Sands
CFP® | Principal @ Arenite Advisory
17822 E. 17th Street, Suite 212, Tustin, CA 92780
Phone: 949-522-6560 | Toll-Free: 866-330-1443 | Fax: 949-771-9817
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