Economic and Market Review (September 11, 2018)

Throughout the spring and summer, one of the most persistent of issues for investment markets has been the future of global trade. Specifically, world markets are faced with the possibility of new tariffs and are questioning the following: what amount might be imposed, on what products, by which countries, against which countries…and, when would any tariffs take effect? Could there be some compromise before any new tariffs take effect? The result of unanswered questions is confusion and uncertainty.

Here is a simple example of how the economy, interest rates, currencies and trade are related: The U.S. has a strong economy and the Federal Reserve seems poised to continue gradually increasing interest rates. The strong economy combined with a probability of higher interest rates has attracted capital into the U.S. away from many other countries. Consequently, the U.S. dollar has increased in value (i.e. stronger dollar) and many foreign currencies have decreased in value against the dollar (i.e. weaker foreign currency). This means U.S. products become relatively more expensive to other countries due to the re-pricing of currency, and might become more expensive if tariffs are imposed by the foreign country on U.S. imports. Likewise, it might become more expensive for the U.S. to import products from foreign countries if the U.S. assesses tariffs on imports. The resulting uncertainty of how tariffs might shift imports and exports between countries causes volatility.

The U.S. economic expansion began in March 2009 and is now in the 2nd longest period of expansion in history. The longest expansion cycle began in February 1991; the longest prior expansion began in January 1961. Despite the ongoing uncertainty of the future direction of world trade, there are several positive U.S. economic and market data points to be aware of (through 9/7/2018):

For the past two quarters, publicly traded companies’ earnings exceeded analysts’ expectations.
The U.S. economy continues to expand.
New orders from businesses for machinery and equipment have increased over four consecutive months.
Spending for residential construction has increased by 10% from one year ago.
New auto sales have averaged greater than 16 million per year for the past five years (reference point: in 2009 annual sales were around 9 million).
The Federal Reserve balance sheet (that is, the amount of debt held by the Fed) has decreased to the lowest point since May 2013. A reminder: The Fed absorbed a significant amount of debt from financial markets after the 2008 crisis.
Unemployment has dropped to 3.8% and the economy continues to add new jobs.
Initial jobless claims are at the lowest level since 1969.
U.S. large company growth stocks are one of the best performing asset classes for U.S. investments year-to-date.

Sincerely,

Timothy A. Weller, CFP®

CERTIFIED FINANCIAL PLANNER™