Trade deficits. Tariffs.

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Reflections on February market turmoil

The fact that the United States has been running a trade deficit for several decades is partially an indication of our wealth relative to other countries and our propensity to consume more than we save rather than an indication of an inherent problem. For example, personal consumption represents more than 70 percent of the U.S. economy with the remainder being comprised of business investment and government spending; the inverse is true of the Chinese economy. Poorer countries tend to consume less while saving and exporting more. What they usually export are raw materials (steel, oil, agricultural products).
It is interesting to note that Iran, Qatar and Malaysia all run trade surpluses, providing some credence to the statement that trade deficits are not inherently good or evil. If they were good, then the economies of those countries would be performing at a much more productive level. They are not. Furthermore, Japan has also historically run a trade deficit despite the fact that its economy has been mired in an economic slump for more than two decades.
That said, we do believe that over the past 20 to 30 years, the United States has negotiated trade pacts with other countries that have hollowed out our middle class, leaving a void that President Trump is attempting to fill. Although we do not believe that raising tariffs is a positive step toward leveling the playing field, we do believe that it is time to renegotiate some of the aging pacts. For example, consider the response by the CEO of General Motors, Mary Barra, when asked on CNBC whether or not she believes that “NAFTA will be altered or even ripped up?”
“Well, I think that if you look at… how technology is affecting cars and how components have changed, when you think about NAFTA 25 years ago, think about the technology that’s in a car today,” she said, “I think there are rules and things we can modernize with tracing, et cetera, that will make less of an administrative burden but still accomplish what the administration and the three countries [United States, Canada, Mexico] need.”
We believe that renegotiating trade pacts is a productive first step rather than imposing tariffs which will increase the cost of doing business, a cost that will be transferred to the consumer, thereby negatively impacting the economy of the United States due to retaliatory steps taken by adversely affected countries. Let’s use our abundance of energy reserves as a carrot to induce others to renegotiate these trade relationships.

What happened in February?
During the month of February, the Dow Jones Industrial Average fell 4.28 percent, marking the first month in 10 that this index has declined, thereby ending its longest monthly win streak since 1959. In addition, according to data from Trim Tabs, domestic equity investors withdrew $41.1 billion during February, the third most since Trim Tabs has been calculating this figure.
The significance of the above paragraph lies in the fact that declines in the stock market and the ending of winning streaks more often than not increase the future potential returns for investors as does the withdrawal of funds from equities. Most investors underperform the indices, selling low after a correction. It is therefore somewhat reasonable to assume that this is what occurred during February as stocks were in the midst of a correction. We do believe that after the market churns around for a bit, à la a washing machine, stocks will move higher.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks, and fluctuations in principal will occur. Research any investment thoroughly prior to committing money or consult with your financial advisor. Note that Fagan Associates, Inc., or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, please call 518.279.1044.

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