2nd Quarter Economic Update

July 31, 2018, by John Norris

John NorrisAs a general rule, I liked roller coasters when I was a kid. The Great American Scream Machine at Six Flags Over Georgia was a favorite, as were just about any other traditional wooden ones. If you aren’t familiar with the one in Atlanta, think of the Cyclone at Coney Island or the Yankee Cannonball at Canobie Lake Park. Closer to home, the Rampage at Alabama Splash Adventure in Bessemer is a surprisingly good ride.

However, I don’t like riders where the intent seemingly is to make one sick to their stomach or facilitate chronic arrhythmia. That isn’t my idea of a good time.

In last quarter’s newsletter, I mentioned how the 1st Quarter had been a roller coaster ride of sorts, and that we should expect more of the same for the remainder of the year. Unfortunately, this prediction was pretty spot on accurate during the 2nd Quarter, and the 3rd Quarter seems to be shaping up for another wild ride.

The culprit? Well, the so-called trade wars the Administration seems to be picking with the remainder of the world are playing havoc with global investor confidence. This makes perfect sense, as we have become accustomed to believing free trade is an economic wonder drug or the key ingredient in wealth creation. But is it?

All other things being equal, freer trade engenders more trade, and more trade is better than less when it comes to economic growth. So, intuitively, tariffs and trade barriers are impediments to economic activity on a macro basis. However, on a micro level, an individual country if you will, some level of protectionism can help domestic industries flourish, which can be good for growth at the local level.

The problem with the US imposing tariffs is much of the remainder of the world is pretty heavily reliant on trade with it for economic well-being. For instance, in 2017, the US imported $26.5 billion worth of goods from Thailand, and was the latter’s second largest export market. This represented about 5.8% of Thailand’s GDP.

Conversely, Thailand was 21st on our list of importers, and that $26.5 billion figure was equal to about 0.13% of US GDP. As such, by just about any measure, trade with the US is arguably more important for Thailand than trade with Thailand is for the US. While this is just one example, it plays out throughout much of the world due to our economy’s massive size and propensity to consume.

So, while the markets seemed to flip and flop during the past quarter, interestingly enough, the S&P 500 had a positive 3.43% total rate of return. Compare this to the MSCI EAFE index, which tracks foreign developed markets, which was down 1.06%. What’s more, the MSCI index for emerging markets, which are typically more trade depending, was off an eye popping 7.90% during the quarter.

Three words: tariffs, roller, and coaster.

Thus far in the battle of words, and even a few tariffs, about trade, the US doesn’t seem to be much worse for the wear. The domestic markets have swung back into positive territory for the year to date, and the economic reports aren’t showing any noticeable negative impacts from trade hysteria alone. In fact, it has been hard to find much wrong with the data and numbers over the last several months with the exception of the headlines about trade.

This isn’t to say the so-called trade wars won’t eventually slow economic activity: they will, at some point in the future which is anyone’s best guess. The question is: who is going to blink first? The US or the rest of the world who is reliant on the US for trade? Yes, THAT is the real question, and, until we find an answer, we will be on a roller coaster ride.

In closing, IF we end up with a positive number in the markets for the year, it will have been a fun ride like those wooden coasters I used to love. IF not, if won’t have been. As I type here in the early 3rd Quarter of 2018, we are still hopeful and hanging on.