Commentaries
PMC Weekly Review - September 21, 2018
In the classic cult comedy, “Groundhog Day,” Pittsburgh-based weatherman Phil Connors, played by Bill Murray, finds himself stuck in a time loop in the small town of Punxsutawney, Pennsylvania, forced to relive the same day over and over. Every day, he finds himself waking up to Sonny & Cher’s “I Got You Babe,” in the same bed and breakfast he stayed in the night prior, having to relive Groundhog Day endlessly. It appears that a similar situation is playing out in the global economic stage, with a seemingly unending news flow out of the United States, announcing either tariffs or the breaking of trade agreements.
Most recently, President Trump announced tariffs on $200 billion of Chinese imports on Monday to take effect on September 24. These tariffs were in response to China’s tariffs on agricultural imports from the US, which themselves were in response to his initial announcement of $50 billion in tariffs on Chinese goods. President Trump further added that if China retaliated with its own fresh round of tariffs, the US would explore applying tariffs on all goods imported from China. In this moment, we are left feeling like Phil Connors, as we replay the same story over and over. The tit-for-tat actions between the world’s two largest economies appear to be devolving into a full-blown trade war. The list of who stands to lose in the trade war is expanding from the agricultural industry, targeted by China, and businesses that import goods from China to all US consumers. The administration initially tried to shield the consumer by targeting mostly commercial imports, but the President’s most recent threat to slap tariffs on all Chinese imports suggests it could expand into broad consumer products. With looming bilateral talks between the two countries, it is hoped that the recent talk of tariffs between the two countries is bluster and negotiating tactics rather than firm plans to implement new tariffs. Oxford Economics estimates that if all Chinese imports to the US are subject to tariffs, it could slash a full percentage point off of US GDP. Considering that the Federal Reserve’s economic forecasts for 2019 range between 2.4% and 2.8%, a 1% drop is very meaningful. Despite this, US markets were stable after the most recent announcement, indicating market participants characterized the recent trade spat as bluster and negotiating tactics.
All this comes on the back of difficult renegotiation of the North American Free Trade Agreement (NAFTA). After reaching a bilateral deal with Mexico, the US threatened to abandon the NAFTA deal altogether. As the US negotiates with Canada, sticking points have stalled talks to renegotiate the trilateral deal.
It remains to be seen whether the world’s two largest economies will be able to reconcile their differences. President Trump seems dead set on leveling what the administration sees as fundamentally unfair trade and business practices out of China, going against many in his own party who see free trade as bolstering the US economy. In addition, a reworking of NAFTA appears to be making headway, but is still incomplete. With news stories regarding trade and tariffs seemingly on repeat, investors could be forgiven if they feel that they are waking up to “I Got You Babe” day after day.
Dan Homan, CFA
Investment Analyst
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2018 Envestnet. All rights reserved.