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Quarterly Comments: May 2019

Trade. Tariffs. Trade. Tariffs and a little bit of Brexit. And the beat goes on.

The beat seems to be picking up tempo, however. Tariffs on items manufactured in China have increased from 10% to 25%, and the range of products on which the tariffs are levied had broadened out to include many consumer items. The stock markets are beginning to rethink the “priced in” assumption that a trade deal would be reached soon. So now we see increased volatility – and not the good kind.

The question for investors is this: how do we deal with the uncertainty caused by a trade and tariff war that produces lack of visibility around inflation, interest rates, and possible recession? How exactly does this play out? A quote from the recent edition of The Kiplinger Letter (vol 96, No. 20) explains the “why” quite well: “Who ends up paying [the cost of the tariffs]? Everyone. The cost of the higher rates will be spread among exporters in China, the US companies that import the goods, retailers that sell them, and ultimately, consumers.”

For investors in both the stock and the bond markets, the concern extends from how much this will cost companies and consumers to when the effects of the added tariff costs will be felt by each of the parties named above. As the added costs work their way through the supply chain, consumers may not see an immediate hike in products they buy every day; this may take several months and even into 2020. We must remember, however, that the stock market anticipates. The uncertainty I am summarizing here may cause markets to decline before we see tangible evidence of inflating costs moving to point of sale merchants and consumers.

Who or what might be beneficiaries of an escalating tariff war? To start, American manufacturers who compete directly with Chinese manufactured imports will benefit. Also, our bond positions have seen nicely positive growth this year. Treasury notes and bonds are direct recipients of money which is fleeing risk, and when more money buys into those Treasuries, the interest rate goes down and the value or price of the bond goes up.

Globally, the British exit from the European Union, better know as Brexit, took a dramatic turn today as the British Prime Minister announced her resignation. With no deal regarding how the British will disengage, markets are concerned that an abrupt exit from the EU will cause known disruptions and reveal countless more unknown consequences. Our European exposure, while reduced, may be further negatively impacted until a new leadership is established in Britain and the European economy adjusts to whatever plan emerges.

In summary, this may be a summer of “wait and see”. We had positioned portfolios to reduce risk in both our equity allocations as well as our non-investment grade bond positions. With an economy that is still robust, unemployment historically low, interest rates also historically low and, according to the most recent release of Federal Reserve meeting minutes, likely to stay that way for the near future, we still see the likelihood of recession as not imminent. We expect the consumer to gradually absorb increased prices with increased wages – up 5.2% year over year according to Bob Brinker (Vol 34, No. 5).

We can’t say that we remain overly optimistic for a positive year, given the escalating headwinds, but we will remain in what I’ll call a “risk adjusted” invested posture for the coming months as we wait to see how the drum beat of the trade war is tuned.

Linda P. Erickson, CFP®



Linda P. Erickson is a Registered Principal of Cetera Advisor Networks LL, member FINRA/SIPC, a broker-dealer & Registered Investment Advisor.

The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

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The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value.


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