April Commentary
The fiscal cliff, Brexit, the election, and now trade. Investors have faced a number of rather substantial challenges over the last few years, most with the potential to severely halt economic growth, not only in the U.S., but globally. In addition to their severity, their frequency has also increased. Each time dire warnings have been announced we have avoided the worst outcomes and moved forward (so far). The current warning dejour comprises trade wars and protectionist policies.
Is this decline the one that will stick? It certainly could be, but it’s too early to tell. A full-fledged trade war would not be good for economic growth or the markets. I repeat, it would not be good. The most plausible outcome would be slower economic growth, higher inflation, lower corporate profits, and weaker business investment, not to mention the negative impact on geopolitical relations. There are generally no winners in trade wars as trade contracts in all countries involved. For those interested in learning more on this topic, a good place to start is reviewing the Smoot-Hawley Tariffs in the 1930s (https://www.economist.com/node/12798595). A spoiler: U.S. imports and exports declined by over 50 percent and it is widely viewed as a primary reason for the length and severity of the Great Depression. Even more, the timing of some key tariff votes in Congress coincided with big drops in the stock market in 1929.
Of course, today is much different than 1930. Multinational corporations operate throughout the entire world and many end user products have components coming from multiple countries. Trade wars could be devastating to cross-border supply chains. This is important because the expectation was for business investment to accelerate this year as corporations reinvested some of their tax savings. Consumers are beginning to tap out and further U.S. economic growth is therefore dependent on business investment increasing. As such, the major risk I see to continued economic growth in 2018 is a trade war.
No one knows what the cause of the next recession will be. However, we are constantly looking for what could spark a decline in economic growth. After 9 years of economic growth, a trade war could certainly qualify as that spark, which is why we are watching very closely the development of global trade policies. In fact, it was one of the negative items we identified at the beginning of the year potentially impacting our base case expectation of slightly stronger economic growth. In the meantime, I hope the current situation takes the same path as the other economic challenges over recent years, much ado about nothing.
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Benjamin W. Jones, CFP?, AIF?
CERTIFIED FINANCIAL PLANNER??
Chief Investment Officer, Principal
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