Stock Market Update 3/22/2018

March 22nd, 2018 by Anchor Bay Capital's Investment Team

The stock market ended down today with the Dow Jones falling 2.9% and the S&P 500 down 2.5%.  These movements were largely in response to President Trump directing the Office of the U.S. Trade Representative to enact as much as $60 billion in new tariffs against China as a retaliation against unfair trade practices including intellectual property theft.  These market movements are consistent with the volatility that we have seen this quarter as a result of political uncertainty.  In general, investors are beginning to respond as the Trump administration becomes more committed to enacting policy to reduce globalization.

While there has been short term volatility in the market, the fundamentals of the economy are still consistent with how we began 2018.  The Federal Reserve announced yesterday that the “Economic outlook has strengthened in recent months.”  The Fed raised the benchmark rate by 0.25% and raised its GDP forecasts for 2018 while also projecting lower unemployment.  What does all this mean for your money?  Stocks typically do well when rates increase.  As far as the bond market goes, bond prices fall when interest rates rise. However, The Fed raising rates will only have dramatic effects on bond prices if rates rise more than what is expected and as of now, the bond market has priced in the rate increases we have seen so far.

In summary, 2018 has experienced more volatility than all of 2017.  These one day moves in the market are normal when you look at the history of the market.  Check out our March market commentary here for a good explanation on historical volatility.  One of the best ways that we can prepare for volatility as investors is to make sure we have the proper asset allocation for our long term objectives.  We will be introducing a new benefit to our clients in the second quarter that allows you to better evaluate your risk capacity during volatile markets.  This will be a great way for us to discuss how your current investments match up with your overall objectives.  As always, please reach out to us with any questions that you may have.

A Quick Breakdown of Tariffs

by Tanner Wrisley

A tariff is simply a tax on foreign goods or imports. The idea here is to make foreign goods more expensive, so that domestic consumers will buy domestic products. For example, the Trump Administration is proposing tariffs on foreign aluminum and steel to help increase demand for US aluminum and steel. Industrial companies like Boeing and other US consumers that were importing the foreign metals will now have to choose between paying the tariff on imported goods in addition to the cost of the good and the cost of importing the good or buying the good domestically in the US. Either way, companies that use these metals will have to pay a higher price, but the result is that demand for US metals may see an increase.

There is a debate going on right now concerning global economic policy.  The point of enacting a tariff is to help the domestic producers and this method is consistent with the commentary of the current administration.  However any interference with trade in global markets will have consequences. As I touched on briefly already, companies in the US that are buying goods with tariffs will have to pay a higher price, in other words this hurts domestic consumers (ie. Boeing down 5.19% and Caterpillar down 5.71% today). Additionally, countries may retaliate with tariffs of their own resulting in a trade war. China is an exporter of steel to the US and may not take kindly to a tariff imposed on their goods.  They may in return place tariffs on goods they import from the US. The fear of a trade war and interruptions of global trade markets is what has the stock market worried today. Higher prices across the board may create less demand and put tighter profit margins on companies.  As stated before, economic policy is an ongoing debate.  Short term market moves are not necessarily an indicator of what the long term effect of these policies will be on our economy.