What’s Up on Wall Street: Q2 2018

In an exceptionally volatile quarter for investors, markets ended lower, with US large company stocks down 0.8%, US small company stocks lower by 0.1%, foreign stocks down 1.7%, and domestic bonds lower by 1.5%.

The stock market swooned in February as traders showed alarm about rising US interest rates. The market sell-off was related to the long-anticipated rise—and possible accelerating future rises—in US interest rates (considered a negative for stocks and bonds) as well as concerns that inflation may be brewing. It may not be just coincidence that this reaction happened in the wake of the recent federal tax cuts, which analysts say will stimulate—unnecessarily say some—the US economy, leading to things such as higher interest rates and inflation.

Tax cuts, along with stepped-up government spending (in March Congress passed a $1.3 trillion budget), may serve to overheat the US economy in coming months, though it is an open question as to whether the tax cuts will actually spur economic growth. Following the passage of the tax bill, there was a series of well-publicized employee bonus and capital investment announcements. (Keep in mind bonuses are one-time and not the same as wage increases.) These were meant to show  that big businesses were sharing the bounty of the tax cuts with workers. Since then, however, studies and polls have shown that business investment has not increased as a result of the tax cut—and neither have wages.

These stimuli may support moderate expansion for a year or even two. But after that, some economists believe that recession risks may rise as diminishing stimuli and higher interest rates combine to precipitate an economic slump—perhaps around the time of the 2020 election cycle. Economists don’t have a great record of predicting the timing of recessions, and the present administration has shown a willingness to make unexpected and disruptive policy changes, so predicting the next recession is a challenge at best.

In March, the president announced significant trade tariffs, which he believes will ultimately enable the US to negotiate more favorable trade terms, particularly with China. The stock market declined sharply on the tariff news, and volatility has continued. Following the 2016 election, euphoric traders focused on the pro-growth elements of the Trump agenda—lower taxes, deregulation, and infrastructure spending. Largely ignored were the anti-growth elements, such as protectionist trading policies and harsh anti-immigration measures.

Since the president campaigned on these issues, these aggressive trade moves should come as no surprise. However, much rests on whether the president’s strategy will exact better terms from trading partners or devolve into an all-out trade-war, in which countries take actions intended to damage the trade interests of one another. Much as in real war, history shows that there are no winners in such situations, and from them the seeds of future conflicts are sown.

The basis of the argument for free, unfettered international trade is that each country leverages its own unique combination of resources to develop its economy where it has a competitive advantage. Classic economics suggest that free trade lowers costs and boosts incomes for each trading partner. While Trump’s adventures in trade policy may well produce unintended consequences, they also avoid addressing what we know as actual Fair Trade principles— the idea that there are populations in many countries who lack representation in trade negotiations and may suffer poverty wages and environmental disregard as a result.

Sustainability is not a word that gets much use in Washington these days. It does, however, endure as a key value for a great number of businesses and remains a guiding principle for socially responsible investors everywhere. There is a growing awareness among business leaders that we’re living in a pivotal moment, when great diligence is called for in responsibly managing both our financial and our natural worlds. Regardless of the current administration’s efforts, we are buoyed by the impressive show of will by leaders in both the public and private sectors to take us forward into a more sustainable future.

Scott Secrest

Scott Secrest

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