Economic conditions continue to be strong but are starting to fray on some of the edges. The first quarter, when all the results were in, was somewhat weaker when compared to YOY comparisons. However, healthy job growth, high levels of business and consumer confidence are still evident. Additionally, two often connected factors, energy prices, and interest rates have been gradually moving up. In both segments, our economy tends to take the increases in stride without much stress until the rate of increases starts to impede prudent borrowing and the costs to manufacture and transport goods. Rapid increases in either or both can have a fairly profound impact on our economy and if severe enough, can lead us into a recession, reversing many positive trends including employment and wage increases. Brad McMillan, Commonwealth’s Chief Investment Officer, reports that 8 out of 10 of the last Bear Markets have started in a recession. We all should be aware of what we are paying for in fuel and our borrowing costs on everything.
The new tax package has helped stimulate our economy and will continue to be a big factor especially if it is made permanent. However, the trade initiative that the President is currently pursuing, one country at a time, has its critics. Project Syndicate labels this a long read but it isn’t. I suggest you read this quite carefully. This is a severe criticism at best of the Trump plan for trade. If the assumptions are correct, which I think is a fair bet, Trump’s plan for trade is a disaster. The tariff proposals combined with this plan, in my estimation, will undue a multilateral and workable trade platform put together by some pretty knowledgeable trade negotiators with specific objectives to achieve. This one country at a time trade negotiation doesn’t improve upon what is currently in place and will likely produce an economic loss to our Global GDP. For the Republicans, this is a poorly thought out and implemented trade policy, which will become a defining issue in the mid-term elections.
I have been looking at all industrial and geographic sectors this weekend through the lenses of 2017’s performance. I do this routinely to look for opportunities to increase or decrease allocations based on current data. Large-cap domestic managers and their European counterparts were in quite a dogfight for top positioning. We were fortunate to have some of both. This year, as we say in sailing, the fleet is spreading out. Italy, in terms of GDP, is ranked in the top four of the EU. Their public discussions about an exit might just be posturing to improve their say on governance and policy. They should remember that the central banks have done plenty on the heels of the great recession. That sentiment probably holds true in the U.S. as well.
We will be in primary season soon enough. I am sure the Democrats and the Republicans are gearing up for a battle royal. I read at lunch today that Charles Krauthammer, a noted thinker, and spokesman for the moderate wing of the Republican Party is expected to die shortly of cancer. He and George Will in concert have provided much-enlightened thinking on solving some of the most trying problems our nation and economy must confront. True intellectual statesmen both and they are in short supply!
*Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.