Steeling the Spotlight

Mar 2, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The week started off on the right foot with strong economic numbers buoying optimism and anticipation of Jerome Powell’s first public statements as head of the Federal Reserve.  However, not a week goes by these days without a fear event shaking investors’ confidence and this week it presented in the form of a tariff.  Sparse on details, this topic quickly overtook the airwaves with experts from every walk of life opining on the consequences such a policy.  Who you believe will partly be a function of who you listen to, watch, and read.  Hopefully, you’ll weigh what I say below and reconcile some of these ideas with your own beliefs.

Let’s talk about the big news.  President Trump announced his administration will impose a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum, on the grounds that other countries’ trade practices endanger our national security by undermining domestic production.  While this goes against the bedrock Republican principle and conservative ideology of free trade, President Trump appears to be rebuffing those in his party who are imploring him to change his mind.  American steel and aluminum companies have long complained of unfair practices by overseas competitors, especially Chinese subsidies, which flood the global marketplace and depress prices making American production less economical.  The big winners are the U.S. steel and aluminum industries.  The most immediate losers are the industries that rely on steel and aluminum which account for such a large part of the U.S. economy.  Some examples include the nation’s biggest industries: the automobile industry; aerospace; heavy equipment; and construction.

Does this matter for the economy?  In a nutshell, this action may create some jobs in domestic metals-producing companies, cost some jobs in a field where steel and aluminum are inputs, and push consumer prices a bit higher.  The U.S. economy can handle it.  The risk comes from the unintended consequences.  Affected countries may well retaliate by ordering tariffs on American goods, and they could carefully target goods to cause economic or political pain.  There are few winners in an all-out trade war.  The irony is that the aim of this administration is to punish China; however, Canada and Brazil are the top exporters of steel and aluminum to the United States.  China doesn’t even crack the top ten.  This surprise announcement seems clumsy, rushed, and extraordinarily broad in nature.  I suspect lobbyists and advisors will craft a more narrowly defined tariff before it takes effect next week.

Unrelated to the tariff news, most major automobile manufacturers reported sales were down in February.  Among those suffering the largest declines are Ford, General Motors, Honda, and Hyundai.  It appears higher interest rates and fewer discounts are dissuading customers from trading up.  Along the same lines, pending home sales declined sharply in January.  While it is too soon to say, it could be interest rates are beginning to change consumer behavior.  On the flip side, consumer confidence hit its highest level since 2000.  Jobless claims hit a multi-year low, the ISM manufacturing index expanded in February, and manufacturing PMI was the strongest in almost fourteen years.  Gains were seen in employment, inventories, backlogs, and supplier deliveries.  It appears the corporate tax break is making a difference.  Companies are in fact spending more on capital equipment.

Companies are also spending more on buying back stock.  Per Goldman Sachs, companies are poised to unleash $2.5 trillion in cash spending in 2018, of which share buybacks will total $650 billion.  The rate at which companies are buying their own stock is now more than double last year according to the Wall Street Journal.  While this doesn’t exactly help the economy, it does impact the stock market favorably.  There is vigorous debate whether companies should repurchase shares but I’ll leave that for another weekly column.  I’m afraid I’ve used my allotted space to cover just a fraction of the many news stories shaping the markets this week.  Have a great weekend and enjoy the sunny weather.  Spring is right around the corner!

March 2, 2018

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