Volatility remained decisive throughout the week and was largely attributed to comments from the new Federal Reserve Chair, Jerome Powell, as well as the announcement from President Trump concerning tariffs on imported steel. As it relates to monetary policy, comments from Chair Powell indicated that the economy remains on solid footing and the expansion appears to be healthy and intact. Such an explanation of economic activity presumes a relatively tighter cycle of interest rates, which means raising them appears to be in the Fed’s playbook over the next 12 months. Market participants are anticipating a minimum of four interest rate increases throughout 2018, as depicted by futures contracts tied to the federal funds interest rate. Although we would argue that raising interest rates is not entirely conducive to maintaining equity market prices at current levels, as well as the borrowing ability of the U.S. consumer, it does make sense for the Fed to consider higher interest rates in an effort to avoid running the economy “hot”, which entails the possibility for excessive consumer and corporate borrowing that may be followed by higher than anticipated inflationary pressures. We’ll be keeping a close eye on all developments and will be most concerned with the spillover risk tied to fixed income investments. On the fiscal policy front, the announcement from President Trump to impose tariffs on imported steel caught many republicans in his own party off-guard, as was the case with market participants. In our view, tariffs are rarely positive in era where domestic U.S. companies (within the Standard & Poor’s 500 Index) derive nearly half of all revenue from abroad (Bloomberg). The notion of true domestic companies lies only within the construct of a small private company or a small publicly traded company. To impose tariffs on the crucial steel industry at a time when trade agreements are contested and debated is something that does not strike us as entirely positive. The threat of a trade war may be possible and the notion of weaker trading power in the global arena may be a risk for the U.S. A similar tariff was enacted by President Bush in 2002. The action saved nearly 10,000 domestic steel related jobs but it was simultaneously responsible for the loss of over 100,000 jobs in other domestic industries affected by the tariff, not to mention the effect it likely had on steel related jobs in countries abroad (Bloomberg). In our opinion, it’s important to think of the consumer as a global participant, not a domestic one. Jobs, and the spillover benefits, are a global matter.
Shifting focus to domestic economic data releases, we learned that fourth quarter annualized gross domestic product (GDP) growth was announced at 2.5% from the previous 2.6% reading. The lower figure was not entirely anticipated but it does remain positive. Consumer consumption data inched notably higher to an annualized growth pace of 3.8%. The data was further supported during the week with the release of personal income data, which was announced higher than had been anticipated. Along with economic growth releases, the Fed’s preferred method of gauging aggregate inflation was also released. The personal consumption expenditures (PCE) index was released at a level of 1.5%, which remains well-below the Fed’s 2% target. The last time the index was above 2% was in early 2012.
Other notable announcements throughout the week centered on new home sales and consumer confidence figures. The former indicated a decrease, which we would attribute to cold weather in the first quarter, while the latter surged back to near all-time highs (Conference Board Index).
Investment advice offered through CX Institutional, a registered investment advisor.
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