833-346-5433

Mar 02, 2018

Rise in Policy Uncertainty Likely to Keep Volatility Elevated

By Bob Landry

Photo credit: Getty Images

Equity markets sold off again today in the wake of an announcement from the Trump Administration that it plans to impose steep tariffs on steel and aluminum imports and recent Congressional testimony from new Fed Chairman Jerome Powell. The S&P 500 closed lower by 1.3% and the yield on the 10-year U.S. Treasury note fell to 2.81% from yesterday’s close of 2.86%. The U.S. Dollar index also slid after the President’s announcement. Asian stock markets were poised to open sharply lower in response.

Markets were spooked by the President’s White House announcement as not much in the way of specific details were provided. Stocks of companies that are heavy users of steel and aluminum, such as General Motors and Boeing, were particularly hard hit.

Our perspective is that there are no winners in a trade war. Our trading partners will not sit idly by without reacting. High-value U.S. exports, such as beef, aircraft, motorcycles, and bourbon to name a few, could easily be targeted for retaliatory tariffs. It is also a bearish signal for the U.S. dollar.

Messing with the global trading system is dangerous. As I wrote in a Macro Brief recently, “…one important development that should concern investors is the creeping restraint on the relatively free flow of goods and services across national borders. Disturbing well-established trading relationships and having politicians decide winners and losers in a competitive global marketplace is not a recipe for continued prosperity. The world was plunged into the Great Depression back in the 1920s in part due to the imposition of a massive tariff wall, better known as the Smoot-Hawley tariff, which resulted in the seizure of global trade flows.

Fortunately, President Trump still has time to assess any possible reprisals or recriminations from this action. The President loves a rising stock market and he does have a penchant for changing his mind. Perhaps the market reaction will lead to a reassessment before an official order is signed in the next week.

Meanwhile, up on Capitol Hill, Mr. Powell met with the House Financial Services Committee on Wednesday and the Senate Banking Committee today for the Fed’s regularly scheduled Humphrey-Hawkins testimony. His relatively hawkish comments suggest that perhaps the Fed is willing to raise its short-term policy rate (the federal funds rate) more aggressively over the course of this year.

Powell, like former Chairman Janet Yellen and most of the economists on the Fed’s staff, stubbornly cling to the discredited Phillips Curve model, which posits an inverse relationship between unemployment and inflation. Powell believes that economic growth is inflationary; as the economy expands, the unemployment rate drops and workers begin receiving higher wages, this necessarily will lead to higher levels of inflation. The Fed will then attempt to cool an “overheating” economy by jacking up interest rates.

Investors are concerned that perhaps the Fed may get too far ahead of its skis since market-based inflation expectations still remain fairly benign.

On the other hand, there is likely considerable political pressure on the Fed to allow American workers to experience rising wages after a long period of tepid gains. This view suggests that Powell may end up moving more slowly on rate increases than his testimony to Congress implied.

Bottom line: As investors digest these events, it is best to prepare for greater levels of volatility ahead. Policy errors, whether fiscal, monetary, trade, or regulatory, can be very disruptive to markets and it appears we are entering a period of greater uncertainty on a number of fronts.

United Capital Financial Advisers, LLC (United Capital) provides financial guidance and makes recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, United Capital has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this blog is intended for information only, is not a recommendation, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances. This blog is a sponsored blog created or supported by United Capital and its employees, organization or group of organizations. This blog does not accept any form of advertising, sponsorship, or paid insertions. Certain authors of our blog posts may be influenced by their background, occupation, religion, political affiliation or experience. It is important to note that the views and opinions expressed on this blog are that of the owner, and not necessarily United Capital Financial Advisers. As a Registered Investment Adviser, United Capital does not allow any testimonials on their blog, and any comments deemed as such United Capital will remove.

United Capital does not offer tax or legal advice; therefore all articles should not be taken as such. Please consult legal or tax professionals for specific information regarding your individual situation. All referenced entities in this site are separate and unrelated to United Capital. Any references to any specific commercial product, process, or service, or the use of any trade, firm or corporation name is for the information and convenience of the public, and does not constitute endorsement, recommendation, or favoring by United Capital.