The Smoot-Hawley tariffs are widely attributed with worsening the state of the Great Depression in the 1930’s. Tariffs were placed on over 20,000 imported goods in the USA. Though nearly a century has passed, tariffs and trade wars are still terms that are viewed with distaste by the general populace and investment professionals.
The terms have been brought into the light again with Trump’s latest rally against foreign imports, most notably from China. Trump has declared a $100 billion tariff on Chinese goods, though these tariffs have yet to come into effect. China has announced it will respond in kind. The earliest these tariffs can come into force, if they ever do, is early August.
The tariffs currently account for less than half a percent of Gross Domestic Product. But what has market participants spooked is the level of uncertainly brought by these announcements. Trade negotiations have yet to take place and the market cannot factor price fluctuations in until clarity is provided.
As it stands, despite much negative press, the S&P 500 is holding steady and did not make fresh lows. This is a good sign and could indicate a rebound in the short term. But it needs to be taken into account that this year is incredibly volatile. 2017 saw very low levels of volatility in the stock market, and as we have previously outlined, a stable year is nearly always followed by a year of increased volatility. Volatility aside, there is much to be positive about for near-term stock prices. These include:
• Strong US Gross Domestic Product.
• Recent tax cuts, which should increase spending.
• Interest rates and inflation are slowly rising.
• Small business optimism at record highs.
• Credit markets show positive sentiment.
• 2018 corporate profits expected to be high.
Two interest rate increases are expected in 2018, as forecasted by the Federal Reserve. This seems to be a reasonable position and one that makes sense. In order for the Federal Reserve to increase rates a third time, drastic events would likely need to unfold, mainly an acceleration in the rate of inflation. The Federal Reserve does not like to hike more times in a year than is strictly necessary. Should the rate of inflation accelerate, it would lead to increased volatility in the market. This level of volatility is not something that is altogether welcome by large-scale investors, particularly institutional investors looking for stable rates of return. The volatility is not limited to the stock market but also overflows to the bond sector. However, the rate of inflation is unlikely to accelerate as quickly as they have been. The bond market is currently holding steady with the 10-year treasury note finally surpassing the 2.6% level.
To conclude, the ongoing negative press in relation to tariffs and trade wars is likely somewhat overblown. The powerful stock market fundamentals will soon take hold and manifest in an increase in stock prices sooner, rather than later. In addition, the Trump administration is known for hype and hot air. The trade war may not take place, or could likely be majorly amended in its current scope. Additionally, the bond market is healthy, the CPI hit its goal of 2.0%, interest rates and inflation are under control, and two-rate hikes seem likely.
As a registered investment advisory firm, HCR Wealth Advisors can create personalized financial strategies to capitalize on what is happening in the market. The firm aims to protect clients against risk and help them reach their financial goals through education, trust, and service. The market fundamentals are strong, and HCR Wealth Advisors can help customers navigate their way through misleading press headlines and herd mentality.
At some stage in 2018 it may make sense to take a more conservative approach to stock market investment. However, given the positive factors underlying the current investment landscape, HCR Wealth Advisors believes it is better await a rise in the market. There is no need for undue concern right now with regard to “Trade Wars” and “Tariffs”.
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