We are now more than halfway through 2018, and the term “trade war” continues to dominate business headlines. Just this week, President Trump threatened to add tariffs to another $200 billion worth of Chinese goods. Technically, the Trump administration has targeted close to $800 billion dollars’ worth of imports for proposed tariffs. However, the actual amount of tariffs implemented to date against trading partners such as China, Europe, Canada and Mexico is much smaller—less than $60 billion, according to Politico.
If all the trade talk remains just that—talk and little action—it is possible that our economy will continue to grow with little impact on stock prices. Up to this point, there seems to be consensus among market participants that Trump is simply using tariffs as a targeted tool of negotiation, and not a sledgehammer of protectionism. Whether the market is correct on this point or not, time will tell. History buffs will recall that the Smoot-Hawley Tariff Act of 1930 raised tariffs on over 20,000 imported goods and began a series of tit-for-tat retaliatory moves around the world that was, in large part, responsible for shrinking global trade by over 60%. In fact, many scholars maintain that the 1930 Act turned a normal cyclical recession into the Great Depression.
Our primary concern at this point is that we probably won’t see any resolution to the trade war conversation anytime soon. If anything, the upcoming mid-term elections are likely to stiffen both the resolve and rhetoric since the subject is very popular with the Republican base. According to the Cook Political Report, the terms “getting things done”, “keeping promises”, and “putting America first” are the top three reasons that people voted for and continue to support President Trump. On the positive side, Fed Chairman Jerome Powell recently stated that the economy “is in a good place” with low unemployment and inflation close to the central bank’s target of 2%.
Stock market performance during the second quarter was all over the place. Growth stocks rebounded after falling sharply in February and March, as did small company stocks. Large value stocks and foreign stocks, on the other hand, ended the first half in the red, down 1.7% and down 2.8% respectively.
Here in the U.S., concern about a possible slowdown in the economy weighed on cyclical sectors like Financial Services and Durable Goods. Internationally, concern about global trade and Brexit kept a lid on investor enthusiasm. Valuations on large, global European companies continues to be significantly lower than that of similar U.S. companies—a disparity that will eventually correct (via increased confidence in foreign stocks or decreased confidence in U.S. stocks).
The bond market reacted to rising interest rates as it always does—bond prices declined and the price of long-term bonds fell more than short-term bonds. The yield curve is very flat right now. If short-term rates rise above long-term rates, that is called an inverted yield curve, which can be a signal (not always) that the economy is headed for recession. Current yield on the 10-year U.S. Treasury is 2.85%. Conforming mortgage rates are around 4.5% (30-year) and 3.75% (15-year).