Keep on Keepin’ On
By John Stoltzfus,
Chief Investment Strategist
There’s Never an “All Clear” Signal
A series of perfect yet unrelated storms roiled markets late last week
A confluence of factors came together last week to create what seemed to us a series of perfect yet unrelated storms caused by sources as diverse as the weather, the White House, political matters and Presidential dictums all of which caused folks from Wall Street to Main Street to sit up, take notice and cope.
So far 2018 is presenting itself as an on again / off again year for the markets as transitions abound across the landscape generated in part by agenda items wielded by an unconventional Presidency, the uncertainty surrounding the policies of a new Chairman at the Fed, and the business community’s (so far) broadly positive response to tax reform. On their own, each has the potential to generate catalysts for the markets and cause investor reactions of positive as well as negative consequence to stock prices.
The latest catalyst for market action appeared disconcertingly last week as a whiff of protectionism came from news that the implementation of tariffs against foreign steel makers and aluminum producers could be imminent. Such action could complicate the process of markets digesting multiple transitions that are already in progress.
We worry that those who somewhat glibly support protectionism have yet to realize how infinitely more complex such action could be in comparison to say the Tax Reform that was rammed so quickly through Congress in the last quarter of the year.
Accountants representing both individuals as well as corporations whom we have spoken with since tax reform became law are still digging their way through the morass of detail in the law—some of which we’ve read appears unclear and contradictory in meaning and to interpretation.
With this latest development from Washington comes no small degree of irony as some of the nations targeted by the proposed protectionist measures just happen to be major trading partners of the US (Mexico and Canada). Both countries are key components in the chain of cross-border suppliers and sub-manufacturers working with American manufacturers—including auto makers.
“Perhaps the talk of tariffs and hostile gesticulation toward foreign trade as it exists today will merely serve as prelude to productive negotiations in the near future.”
Just as the fundamentals (economic and corporate) appeared to be showing near “irrefutable” signs of sustainability here and around the world, prospects for protectionist actions have appeared on the scene loud and ugly, and which could bring equally unsavory retaliation from around the world.
For now it appears too soon to draw conclusions as to just how disruptive to global trade these protectionist tariffs would be to trading partners and the economies (including America’s) involved. Until considerable detail is provided by those who will be assigned the task of implementing such measures, markets could likely churn in place.
From our perspective we can’t recall a positive outcome from protectionist policies over the course of our country’s history.
Our historic recall does not find protectionism to have been a practical solution to unfair trade practices or to addressing trade agreements from a prior era that are on the verge of becoming anachronisms in a digitalized, globalized world. We raise concern that in a world so steeped in globalization and borderless technological application, protectionism might likely destroy more than it would fix.
Perhaps the talk of tariffs and hostile gesticulation toward foreign trade as it exists today will merely serve as prelude to productive negotiations in the near future. Time will tell. Patience will be required of investors for now.
The markets initially responded negatively early on last week when protectionism re-appeared high on the President’s agenda.
However, as Friday unfolded it appeared that cooler heads prevailed, negative projection dissipated and the stock market closed higher on the day and ahead of the weekend.
However, for the week through last Friday the S&P 500, the S&P 400 (mid-caps), the Russell 2000 (small caps) and the Nasdaq Composite (some 40% weighted in tech and techrelated shares) respectively shed 2.04%, 1.35%, 1.03% and 1.08%.
Developed foreign markets and emerging markets fared worse than their US counterparts last week with MSCI EAFE (developed markets ex-US and Canada) and the MSCI Emerging markets respectively falling 2.91% and 2.83%. MSCI Frontier Markets performed better, easing 0.51% lower last week.
The Week Ahead
This week will keep investors plenty busy as they seek more information as to what protectionist action might actually look like and whether or not there will be exclusions of such policy when dealing with allies and strategic partners.
There will also be plenty of economic data crossing the transom this week including:
Today (Monday): ISM non-manufacturing composite;
Tuesday: Factory orders; durable goods orders; capital goods orders.
Wednesday: ADP Employment; Non-farm productivity; Unit labor costs; the trade balance; Federal Reserve’s Beige Book; consumer credit.
Thursday: Initial Jobless claims; household change in net worth;
Friday: Change in non-farm payrolls; the unemployment rate; average hourly earnings; labor force participation rate; wholesale inventories.
The VIX remains elevated even as it has declined some 47.6% from the level to which it had spiked on February 5. It remains 64% above its average level over the past 12 months. Further episodes of volatility should be expected as the transition of Fed leadership and process of interest rate normalization move forward, and markets consider the impact of protectionist measures.
Bitcoin, the crypto currency, has rallied 36% from its recent low though last Friday but remains 40% off of its peak.
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