What’s Up on Wall Street – Summer 2018

The stock market headed into summer on an up note, with large company stocks rising 3.4% for the quarter and small company stocks up 7.8%, though foreign stocks were down 1.2%. More interest rate hikes continued to weigh on bonds, which were off 0.2% over the three months.

The bond market is historically far less risky (volatile) than the stock market, though the market still does fluctuate. One of the key drivers of bond market fluctuations is movement in interest rates. The Fed, which sets short-term rates, has increased the rate twice so far in 2018 and has stated its intention to raise it twice more. Bond values move opposite the direction of interest rates because when newly issued bonds are offering higher rates, existing bonds are less valuable in comparison. This has contributed to the recent low and even negative return in bonds. Still, bonds provide valuable ballast to investment accounts by offsetting some of the more dramatic downside risk of the stock market. As such, we generally believe that it is a better idea to hang on to bonds through the interest rate cycles. At some point in the future, rates are likely to fall again.

Much of the stock market volatility during the quarter was related to the Trump administration’s announcements on adding and/or expanding tariffs on foreign made goods. A tariff is a special tax levied on imported products. The theory goes that the added tax makes the foreign goods more expensive and therefore less competitive than domestic products, thereby boosting demand for domestically made goods. This in turn may contribute to growth in the domestic economy. However, attaching tariffs to foreign goods invites retaliatory actions from those trading partners, and indeed this is what we’re seeing play out.

Because the less expensive imported products will now be more expensive due to the tariffs, and the domestic products were generally more expensive already, the overall effect can be to create inflationary pressure. Inflation without corresponding wage increases lowers general living standards. Moreover, enough inflation can undermine the very economy the tariffs are supposed to protect.

With some imagination, we might conclude that the administration is carrying out a veiled yet well-crafted plan within the highly complex world of international trade and economics. Another analysis might be that there is little policy at all other than the administration’s general belief that the U.S. has been taken advantage of in trade and it’s time to make things right. Whatever it is, the stakes are extraordinarily high. The modern global economy is a complex ecosystem operating in a delicate balance. It doesn’t take much injudicious tinkering to create systemic imbalances with damaging and far-reaching consequences.

In June, the executive branch reversed a policy on separating immigrant families that sent children to separate and often distant holding facilities from their parents. This was part of the “zero-tolerance” policy regarding unlawful immigration. The administration has previously announced its objective to reduce legal immigration as well – by half. Questions of morality aside, the economics of it are at odds with the president’s stated economic growth objectives. According the Wall Street Journal, the surge of retiring baby boomers is reshaping the U.S. into a country with fewer workers to support the elderly though programs such as social security and Medicare. The ratio of retired Americans to working Americans has increased significantly in recent decades.

America’s birth rate registered another record low in 2017 in nearly all age groups according to the Centers for Disease Control and Prevention. Growing, or the very least maintaining, the labor force is a cornerstone of economic stability and expansion—especially in an economy like ours, where service jobs account for about 80% of private sector employment. Economists of all political stripes have noted that working age immigrants will be an indispensable component of U.S. economic security in the future.

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Scott Secrest

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