by Daniel Yu, CFA®, AIF®, REDW Stanley Financial Advisors
As we considered this newsletter, the smooth monthly returns experienced in 2017 seem to be a happy and longed for memory. As we noted in earlier newsletters, volatility is the norm while 2017 was the exception. In order to gauge any bout of volatility we have to review it against the broad economic picture. In a 2017 newsletter we discussed the pillars of economic growth (Monetary Policy, Taxation, Government Spending, Regulation, and Trade), and in early 2018 most of these issues were re-evaluated. While Monetary Policy (i.e., rates) and the benefits of the new tax law led the discussion in the early part of the quarter, it was concerns over trade and regulations that dominated the latter part of the quarter.
With the announcement of new trade tariffs on steel and aluminum, we began a rocky ride in the markets as participants have tried to value the impact of each piece of news. Taking a step back, we generally do not support tariffs as they are a tax that benefits a small number while increasing the costs to a broader number. Why shouldn’t consumers be allowed to purchase goods and services from the lowest cost provider? Moreover, tariffs tend to invite retaliation, which slows down the velocity of money or how often money changes hands. As the situation with tariffs develops, we may need to alter our view on future GDP growth.
Regulation is another area under consideration. Various developments in technology are now inviting discussion on if and how they should be regulated. How responsible are social media platforms to monitor and regulate what is said? What changes should happen at Facebook, Twitter, and others? When is regulation a hidden form of censorship? In light of recent crashes, what should be done in the autonomous vehicle arena? What rules and regulations should be in place regarding cryptocurrencies like Bitcoin? Regulations can be difficult to develop and implement, as you want them to both protect the public without stifling innovation and creativity. Regulations are themselves a cost of doing business and in the short term they can lower the growth of a company’s earnings.
On the whole we continue to expect US GDP to accelerate to close to 3% in 2018 as the new tax law should benefit the economy through increased discretionary income, corporate investment, and higher earnings. These benefits will take all of 2018 and probably part of 2019 to filter into the broad economic data. We also expect interest rates to generally climb during 2018 with shorter rates increasing the most, what is called a flattening yield curve.
As the various market participants interacted through the quarter, we noticed money moving from one asset class to another, reaffirming the argument of having a diversified and asset allocated portfolio. However, volatility can be a difficult thing to endure. If you find yourself worrying about your portfolio, then please call or email your Relationship Manager. A discussion regarding your goals and any potential changes in your risk tolerance could be in order.
Copyright 2018 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice.
