Trade War – a Game of Chicken

In 1934 Congress passed the Reciprocal Tariff Act which essentially ceded to the President authority to negotiate tariffs with other countries. This bill was passed as the U.S. was exiting the Great Depression and Congress looked to reverse the disastrous Smoot-Hawley Tariff bill of 1930. (Further background on the Smoot-Hawley bill can be found in an earlier write-up here.) When drafting the Smoot-Hawley Tariff bill, the scope and size of the bill increased dramatically as many Congressmen added provisions to protect businesses in their home states. By passing the Reciprocal Tariff Act of 1934, Congress essentially acknowledged they were not capable of containing special interests and empowered the President with authority over tariffs.

President Trump has wielded these trade powers in a new and unpredictable manner. Investors are concerned that a trade war could bring higher inflation and a global economic slowdown. The trade issues began in March when President Trump announced tariffs on steel and aluminum imports with some countries like Mexico and Canada being exempted. The tariffs affected approximately $40 billion in imported goods. The Federal Reserve of Dallas estimates these tariffs could lower U.S. GDP by an inconsequential 0.24% as steel and aluminum imports account for a relatively small piece of the U.S. economy.

Since these tariffs were announced, the U.S. and China each threatened an additional $50 billion in tariffs and most recently escalated that threat to $200 billion in goods. In May, President Trump ordered a review of imported cars to the U.S. which is similar to the review he ordered for steel and aluminum. Car imports are sizable, totaling $179 billion annually. Tariffs on imported cars would spread the trade conflict to Japan and Germany and increase restrictions on Canada and Mexico. Given the size and importance of the car industry, retaliation is likely.

The effects of trade are complex as they create many winners and losers. While consumers benefit from inexpensive goods from China; trade with China has, objectively, not been fair. The Chinese government restricts foreign access to Chinese markets, provides direct subsidies to Chinese exporters, and suppresses the value of the Chinese Yuan by purchasing U.S. government debt – they own over $1.1 trillion. President Trump’s approach appeals to those in the U.S. whose pay and standard of living has fallen due to unfair trade.

While there is a lot of room for improvement on trade, a trade war could make matters worse for the U.S. in the long run. The Federal Reserve of Dallas estimates that a full blown trade war (which includes trade retaliation and includes the European Union and China) could cut 3.5% from U.S. economic growth. Essentially, a full-blown trade war could bring a recession. While recent rhetoric has made stock markets more volatile, recent declines are more reflective of uncertainty rather than a signal that investors expect a recession. President Trump knows he controls access to the world’s largest consumer driven economy and expects some concessions and more balanced trade. This game of chicken is risky and markets are reacting to the rhetoric on both sides. That said, markets still expect both countries will walk back their rhetoric and find some common ground.

Given the increased uncertainty, it is important for clients to stick to their long-term goals. Crestwood strives to manage diversified portfolios to help mitigate these market swings. Over the last few months, we have increased the quality of our bond portfolios and maintained an overweight to U.S. stocks, which have fared better than international markets during this public trade war posturing. We are confident that a continued focus on long-term goals and a diversified investment portfolio aligned with these goals are the keys to managing wealth in turbulent markets.

Trump’s Tariffs

On March 1st, 2018 President Trump announced his intention to impose significant tariffs on steel and aluminum imports. The announcement sent stock and bond prices falling, stoking fears of higher prices and slower economic growth. Protecting domestic industries like steel and aluminum may have raw appeal, but tariffs are flawed in theory and have a history of hurting economic growth. History shows a link between tariffs and populism which last flourished in the 1930’s. President Trump’s proposed tariffs threaten the post WWII global trade order and stock and bond markets are now paying attention.

Tariffs are bad policy

Basic economics instructs that tariffs benefit a select few producers and harm consumers through higher prices as they reduce competition and allow less efficient producers to continue to operate. In 1776, Adam Smith wrote of comparative advantage stating that countries should focus on their low cost production and trade for goods where their costs of production are relatively high. In general, society benefits from trade as wealth rises everywhere.

Tariffs have a consistent history of reducing economic activity and hurting growth1. The clearest example is the infamous Smoot Hawley Tariff Act of 1930, which essentially doubled tariffs on over 20,000 imported goods to an average rate over 50%. While this was one of many policy errors that contributed to the depth and length of the Great Depression, there is general agreement that these tariffs made matters worse. The effect of these tariffs on global trade are clear – from 1929 to 1933 world exports collapsed by roughly 55%. Continue reading

Volatility is Back!

Stock markets around the globe have sold off over the past few trading days, giving back most of their gains for 2018. Notably, the S&P 500 was down 4.1% yesterday and 6.1% over the past two days, a level of volatility not seen since 2011. This sharp downturn has increased fears of a looming bear market. While we cannot predict where the market goes in the coming days and weeks, today’s market has key fundamental strengths most bear markets lack.

Economic Indicators are positive
The main differentiator between a stock market correction and a prolonged bear market is that bear markets are normally associated with a recession. During a recession, consumption, the main driver of the U.S. economy, falls for an extended period as unemployment rises. Stock markets don’t react well to recessions because earnings across sectors can decrease meaningfully. The fortuitous cycle that helps stocks during periods of earnings increases, improved outlooks and higher valuations reverses as earnings fall, outlooks dim and stock values plunge. Recessions are painful to stock investors.
Unemployment today stands at 4.1%, the lowest level in 17 years! In January, the U.S. economy continued its steady improvements, adding another 200,000 jobs, which marked the 88th consecutive month with U.S. job growth, the longest stretch since 1939. The U.S. economy is unlikely to fall into recession with such strong job growth. Continue reading

Crestwood on the MOVE!

We hope that your 2018 is off to a great start! We wanted to share the exciting news of our upcoming move. Our continued growth has created the need for more space and the opportunity to redesign a new office to allow us to better serve our clients!

As of February 26th, Crestwood Advisors will be located at:

One Liberty Square
Suite 500
Boston, MA 02109

We look forward to giving you a tour of our new space at your next visit. Parking arrangements at nearby P.O. Square Garage will remain the most convenient option when visiting. Please update your records, and as always, feel free to reach out to us with any questions.

Crestwood Advisors adds new partner

We are pleased to announce the addition of Alyson L. Nickse, CFP®, CDFA®
as a Partner at Crestwood Advisors.  Alyson joined Crestwood Advisors in September 2012 as a Wealth Manager and has over 15 years experience in wealth management.  Her focus on building integrated, holistic wealth plans that help our clients achieve their investment, philanthropic, estate & tax planning goals benefits both Crestwood and our clients as we continue to grow.  Alyson graduated with a BA from Colby College and has earned her CFP® and CDFA® designations and is a founding member of the Crestwood Women & Wealth Collaborative.

We remain committed to devoting and retaining the resources necessary to deliver the wealth management results that our clients expect from us.  We continue to experience significant growth in client assets under management and we are confident that this is due to the strength of our entire team’s focus on delivering strong investment and wealth management solutions to our clients and our commitment to open, honest and ongoing dialogue with our clients.

We are happy to welcome Alyson as a Partner at Crestwood Advisors and delighted to share the news with you.

As always, please contact us if you have any questions.

Predicting the stock market is a bad idea

With the benefit of hindsight, few tasks look easier than pointing out a market peak. Looking at a price chart of the stocks market, it is easy to point to the top and say, “Here is where to sell stocks.” Unfortunately, there are few indicators that help anticipate market tops. While market valuation is useful over 10-year periods, it is a poor indicator over a 1-year period. At Crestwood, we believe that trying to beat the market by attempting to anticipate the stock market’s ups and downs is a fool’s errand due to the sporadic nature of returns, importance of tax-deferred compounding and irrational behavior of investors.

Every day matters
Over the past seven calendar years, if you missed the best 5 days in the stock market your return drops significantly, falling from 132.7% to 87.6%! The below chart shows the outsized effect of missing days in the market can have on long-term returns: Continue reading

“Wake Me Up When September Ends” – Green Day

September is historically the worst calendar month of the year for stock market returns. Since 1950, the average September return for the S&P 500 index is -0.7%.  Additionally, negative news which could affect stocks appear to be piling up including the impacts of Hurricanes Harvey and Irma, North Korea nuclear tests, the now extended deadline for debt limit talks and the continued Washington gridlock.  The strong stock market optimism from the beginning of this year seems to have faded and, with stock market valuations above historical averages, the fear is “what goes up must come down”.

We don’t dismiss any of these risks but, as investors, we understand that predicting near-term movement of markets is impossible. Most bear markets are accompanied by a recession and, importantly, current indicators of the economy show we are still in a modest and steady expansion.  The stock market’s performance this year has been driven more by strong earnings and economic strength than the promise of stimulus from President Trump’s agenda.  This year has been a good reminder that politics makes for good headlines and feverish emotions, but policy change in Washington moves slowly.  Additionally, while President Trump’s executive changes have been grabbing headlines most will have little to no immediate economic impact. Continue reading

A discussion of “Liquid Alternative” Investments

Throughout financial history, every bull market seems to be characterized by some new investment product or vehicle that captures investors’ fancy. Like housing bonds in the early 2000’s, mutual funds in the 1980’s, and junk bonds in the 1970’s, liquid alternative assets appear to be that vehicle of the current bull market.

Prior to 2008, alternative investments were primarily available to only endowments and institutional investors. However, in recent years, investment companies created mutual funds with the promise of bringing similar strategies to all investors. These funds have seen tremendous growth and broad acceptance as many investors and advisors have allocated to these liquid alternatives in an attempt to build more diversified, sophisticated and endowment-like portfolios. Unfortunately, performance of liquid alternatives funds over the last five years has broadly disappointed investors. Continue reading

Crestwood Perspectives: Trump’s Impact on Investment Markets

Yesterday’s unexpected election result causes investors to wonder what can be expected over the next few years from a Trump presidency and a divided country. This election has been highly emotional and personal, leaving many of us bleary-eyed and uncertain about the future. The high level of emotion in this election is reflected in global stock markets, which initially sold off on Wednesday following Trump’s victory only to recover strongly as the day progressed. At Crestwood we know that emotions and investing don’t mix well. We try to look past the rhetoric to analyze potential long term outcomes of the election.

Uncertainty

Markets don’t like uncertainty and global stock markets initially sold off in reaction to Trump’s surprise victory. Adding to investors’ unease has been Trump’s avalanche of eye-popping rhetoric throughout the campaign. Trump wants to fire Janet Yellen, Chair of the Board of Governors of the Federal Reserve, tear up the North American Free Trade Agreement (NAFTA) and even suggested renegotiating the U.S. debt obligations. These comments are a small sample of his suggested changes that concern investors. With all of these comments long on rhetoric and short on details we are left speculating, for the moment, on how a Trump presidency will affect the markets. Continue reading