While new tariffs could evoke negative repercussions, the U.S. economy continues to enjoy positive growth. Get the details to these stories and more in this latest edition of Steady Investor’s Week.
Jerome Powell Speaks – the new Federal Reserve Chairman made his first public remarks as the head of the U.S. central bank, which sent market participants scrambling to analyze every word and phrase. A quick summary of Mr. Powell’s statements is as follows (according to Bloomberg):
- He indicated three or more interest rates hikes during 2018 to prevent the U.S. economy from overheating, though he seems settled on three or four. He also indicated the Fed’s intent to allow the balance sheet to continue shrinking to more normal levels.
- Regarding recent market volatility, Mr. Powell seemed to downplay its potential spillover effects to the economy, which he painted as strong overall.
- Powell observed that accelerating U.S. growth is occurring within a “moment of global growth,” when headwinds have shifted to tailwinds. As U.S. growth has fed into global growth, the opposite is also occurring in a feedback loop, reinforcing the pro-growth impact of fiscal policy (tax cuts) and steady business investment.
- On wages, Mr. Powell indicated that with the unemployment rate at a historically low level and with the labor participation rate holding steady, the Fed expects wage growth to pick up and for inflation to follow.
- Finally, in what we found to be perhaps the most interesting note, Mr. Powell cautioned against exclusively using the flattening yield curve and history as a marker of an impending recession.
The Precarious Issue of Tariffs – President Trump indicated this week that his administration will announce steep tariffs on the imports of steel and aluminum products in the coming week. The announcement is expected to unveil a 25% import tariff on steel and a 10% tariff on aluminum (according to Politico). While these tariffs may provide some short-term relief for domestic and aluminum producers, it could stand to have far greater repercussions should trading partners respond with tariffs of their own – igniting a potential trade battle. Any type of retaliatory tariff could put pressure on other industries, like agriculture, and at worst result in rising cost of goods for companies and consumers.
China Party Dominance – global politics was abuzz this week as news came from China of a proposal to eliminate a two-term constitutional cap on presidential terms, solidifying signs that Xi Jinping intends to stay in power indefinitely. If history tells us anything, it’s that one party one-person rule rarely ends well.
Second Estimate for Q4 2017 GDP – the Bureau of Economic Analysis released data this week on the U.S. economy, indicating solid growth as expected in Q4 2017. Real gross domestic product (GDP) increased at an annual rate of 2.5% in the fourth quarter, following a 3.2% increase in Q3 2017. The GDP estimate released this week was based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 2.6%. The acceleration in real GDP from 2016 to 2017 reflected upturns in nonresidential fixed investment and in exports, along with a smaller decrease in private inventory investment. These movements were partly offset by decelerations in residential fixed investment and in state and local government spending. Imports, which are a subtraction in the calculation of GDP, accelerated.
While data this week shows solid growth for the U.S. economy, how long can this momentum last? Just last month we experienced a correction and this week we saw the market drop again. In our view, this recent correction could potentially be a precursor to a bigger, longer drawdown.
So now the question to you, “Is your portfolio prepared for another correction or even a potential bear market?”
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