Spring 2018 Investment Letter

Fasten your Seatbelts

The market turbulence that began in February has been sustained through the spring with no signs of abating. Investor uncertainty was originally focused on signs of rising inflation, but soon shifted to the aggressive tactics the Trump administration is employing toward its trade policy.

To date, inflation remains below the historical average and continues to inch closer toward the Federal Reserve’s 2% target. The Federal Reserve’s objective, as mandated by law, is to maximize employment while containing inflation. Thus far in 2018, both objectives are being met.

Unemployment is at multi-decade lows, which is a positive sign for consumer spending and an indication of a healthy economy. Recent labor market data illustrated that in May there was an open job opportunity for every American worker. While there are skills gaps and discouraged workers in all of these economic statistics, it is fair to say that opportunities abound for the American worker.

With this sort of economic back-drop, one could argue that it is an opportune time to press our trading partners around the globe for better terms of trade. The tactics employed by the current administration have put the world on notice. Initially, markets were taking trade skirmish/war and tariff talk in stride, but as time goes on deadlines come and go and the bite of these policies transform from a negotiating tactic to an economic reality.

This has introduced a source of uncertainty for businesses and investors.
The multi-lateral global trading system that was put in place largely by the U.S., along with its allies in the post-World War II era, is being tested. The timing of decisions and agreements will be dynamic and will move markets. Hopefully, the result will be an economic environment with lower barriers to trade where all national economies are able to leverage their competitive advantages to produce goods and services with greater efficiency and lower prices for all. Time will tell.

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Global Unsynchronized Growth

Implications for internationally focused investments are potentially significant. The theme of global synchronized growth from last year has played out. The data from Europe has already slowed down. This has been accompanied by political instability. In Asia, China is in the crosshairs of the Trump administration. This is coming at a time when their economic data is indicating a slowdown as well. The balance of trade is clear: Europe and China have more to lose from a trade war than the U.S. in terms of trade in goods (as opposed to services). Additionally, there will be companies that will be unaffected by these issues as their production and distribution are domestically concentrated.

Staying the Course

The return of uncertainty and volatility to the markets is more a return to normal than a sign of something more sinister. Investing inherently involves risk. It is the management of those risks that makes the difference between a bumpy ride and a catastrophic one. Maintaining a commitment to process and discipline is how we get through the ups and downs of this constantly evolving environment. As always, if you have questions or would like to have a conversation, please do not hesitate to contact us.

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As always, if you have any questions or would like to have a conversation, please reach out to us or your portfolio manager.