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%.

Interestingly, there are many similarities between the 1930’s and today. Populist politicians flourished during both periods due to voter anger at 1) wealth and opportunity gaps, 2) perceived cultural threats, 3) established elites, and 4) claims of the government not working2. Both periods have similar economic overtones – low interest rates, low economic growth, stagnant wage increases and high debt burdens. In 1930, over 1,000 economists sent President Hoover a petition expressing their opposition to the Smoot Hawley bill, asking for his veto. President Hoover disregarded the petition due to voter anger at established elites. In a similar fashion, President Trump has ignored the advice of many of his advisors with these tariffs.

Politically, tariffs are easy to implement and hard to remove. One example is the Chicken Tax levied by France and Germany in the early 1960’s3. Success of U.S. chicken exports to Europe caused outcries from European farmers who lobbied politicians to tax chicken imports at 25%. The U.S. retaliated by taxing pickup trucks and commercial vans at 25%. Both sides of this tax remain in place today. In the market for sedans, foreign competition has improved car quality and choice for consumers, with even U.S. auto producers compelled to build better cars to compete. Consumers benefit from imports through improved quality and lowered prices for sedans, while competition and improvements for trucks and vans has lagged.

Anticipated effects of taxing steel and aluminum imports

Higher prices. For certain we can expect these tariffs to result in higher prices. Steel and aluminum are key inputs for production for companies in the U.S. Higher raw material prices will put U.S. producers at a competitive disadvantage against foreign producers. In recent stock market action U.S. car and plane manufacturers have been hit hard.

Job losses, not gains. The U.S. last imposed steel tariffs under President Bush in 2002. The project was abandoned after 20 months when a 2003 report estimated that the tariffs cost in excess of 200,000 jobs—more than the total number of people then employed in the entire steel industry at the time4. Today, steel makers employ about 140,000 workers while industries that use steel as an input employ some 6.5 million Americans. Transportation industries like aircraft and autos account for about 40% of domestic steel consumption and will have to pay higher prices for steel. These tariffs will hurt U.S. competitiveness globally5.

As with the coal industry, automation, not falling production, has been a big part of the secular decline in workers employed. The Wall Street Journal recently highlighted a Voestalpine AG steel plant in Austria that employs 14 people today to produce 500,000 tons of steel a year. That output would have required 1,000 employees in 1960.

Retaliation. Expect the EU and other countries not exempted from the tariff to implement their own tariffs on U.S. goods. Likely candidates include agriculture, cars, motorcycles, airplanes and even Jack Daniels. Foreign politicians will try to hurt the U.S. in very specific ways to invoke the strongest political response. Think chickens = pick-up trucks.

Missed target? By far our largest trade deficit is with China which totaled $375.2 billion last year. President Trump’s steel and aluminum tariffs will not affect China’s trade surplus with the U.S. Canada is hit hardest by these tariffs as they are the largest exporter to the U.S. for both aluminum (56% of U.S. imports) and steel (16% of U.S. imports).

Security threat? President Trump justified the tariffs by claiming our national security was at risk. This broad rationale applies to all countries who export steel and aluminum to the U.S. Prior administrations used tariffs for anti-dumping protection to single out one country who was selling in the U.S. at a price below their cost of production. The ‘national security’ clause is a rarely used nuclear option which sidesteps World Trade Organization rules. The claim is a bit thin as the U.S. imports only 30% of total steel used and all steel used by armed services is produced domestically. By claiming this option the U.S., as the world’s largest economy, has opened the door for other countries to follow. If countries side step existing trading laws and norms, the post-world war II trading order will be in jeopardy.

Markets reacting to political risks

The tariff announcement seemed rushed as evidenced by the disagreement within President Trump’s administration and key committee heads in Congress who were unaware of the details. Speaker Paul Ryan has urged President Trump to reconsider and provide exemptions for certain countries. Until this tariff announcement, President Trump’s actions have been mostly pro-business and pro-growth which has allowed the market to shrug off many of his volatile statements and provocative tweets. Perhaps markets start to pay more attention to his tweets and comments.

Unfair trade?

President Trump evaluates trade relations based on size of current account deficit. Trade deficits do not necessarily make a country poorer as it ignores the effects of the offsetting capital account6. Dollars used to buy foreign goods (less the value of our exports) flow back into the U.S. as investment. Since the U.S. trade deficit of the past 10 years has averaged $560 billion per year, there has been a lot of foreign capital flowing into the U.S. Foreign governments own a whopping $6.3 trillion of U.S. Government debt which is 33% of the total government debt. The U.S. benefits through lower interest rates. However, capital flowing into U.S. can be excessive, increase asset prices and in some cases cause asset bubbles. Foreign capital definitely helped fuel the housing bubble from 2004 to 20077. In theory trade deficits will weaken a country’s currency and the trade imbalance will self-adjust, because imports get more expensive and exports get cheaper as the dollar falls. Instead surplus countries have used their dollars from trade to buy U.S. assets averting currency markets, which explains why the U.S. has run a large persistent deficit since 1991. While President Trump’s view of deficits is overly simplistic, there is room to improve trade relations. Instead of harmful tariffs, finding a way to balance capital accounts would lead to more free currency markets and balanced trade.

There are other ways trade can be ‘unfair’. Foreign government subsidies, unconstrained ability to pollute, and cruel labor practices can give foreign companies a big cost advantage over U.S. companies. Socially conscious firms like Whole Foods promote ‘fair trade’ goods for their like-minded consumers. Mandating a level playing field for benefits and working conditions globally would help U.S. workers and improve U.S. relative competitiveness. Admittedly, these changes would be difficult to implement, but Trump’s anti-trade message has resonated with many voters.


During periods of uncertainty, portfolio diversification is paramount. We continue to be well positioned in high quality and short duration fixed income investments. We expect the trend towards higher inflation will benefit our alternative investments. Higher energy prices are a tailwind for MLPs and real estate managers tend to be good at raising rents to keep pace with inflation. For individual stocks, we continue to focus on companies with strong return on invested capital. While we cannot predict new tariffs, we believe our quality portfolio will weather the ups and downs of the market.

On March 2nd, President Trump tweeted “Trade wars are good and easy to win”. We believe neither to be true.


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.

Employment conditions are not the only strong economic indicators. GDP growth has been solid; growing between 2%-3%. Consumers are doing well and worker pay jumped in January by 2.9%. Generally, increased wages are positive for the average consumer and households.

Company revenue and earnings growth are strong
So far about 50% of S&P 500 companies have reported fourth quarter results, representing about 70% of the index market capitalization. About 80% of these companies have beat revenue expectations, which are on pace for a 7.5% revenue increase compared to an expectation of 7%. To this point, all 11 sectors have reported year over year earnings growth.
In the past, it seems recessions are marked by a frothy sector with high investor exuberance that ends poorly. Examples are real estate in the 80’s, dot-com companies in the 90’s and financial services in 2008. During these periods, as the economy slipped into recession, the over investment and hype of these sectors soured into disappointment and large losses. While it is hard to forecast these manias, we don’t see a particularly frothy sector today whose demise will dent economic growth.

What drove the sell off?
While there is no clear catalyst, markets have been concerned about increasing interest rates, rising inflation and high stock valuations. Since 2013, the Federal Reserve has been reducing the amount of monetary stimulus to the U.S. economy. In 2015, the Federal Reserve began to slowly increase short term interest rates. Currently, the Federal Reserve is targeting short term rates at 1.75%. Markets expect that to rise to 2.5% to 3.0% by year end. By historical comparison, these rates are still low, reflecting the relatively slow recovery from the 2008 Great Recession and the measured pace which the Federal Reserve has taken to increase rates. However, given recent U.S. economic strength and job growth, market interest rates, which had stayed flat relative actions taken by the Federal Reserve, have risen. The yield on the 10-year U.S. Treasury bond increased from 2.4% at year-end to over 2.8%. Bond investors have expected wage growth to lead to inflation, which can erode the value of bonds.
While stock valuation are above average, valuations alone are a poor indicator for returns over shorter time periods and are an unlikely catalyst for the recent volatility. A more likely catalyst explaining the sharp decline is program trading. In stock markets, a lot of money is controlled by computer programs based on market trends. When the trend turns negative, they sell. Of course, selling more when the market drops only exacerbates the downturn. Clearly, this market action does not reflect long term investors, because the market fundamentals are still strong.

Crestwood monitors these market dislocations looking for opportunities. Our portfolios are built around diversification with the intent of smoothing out the markets’ ups and downs. Over the past few years we have continuously adjusted allocations as valuations have increased. Importantly, we do not believe the recent market decline reflects a deterioration in economic fundamentals which are strong and improving. Considering the market’s high valuation and recent stock market increases, this decline can be considered a positive to let the market catch its breath.

We recognize that the sharp declines of the past few days are uncomfortable. All of us prefer the relative calm of the generally upward trending stock market in recent years; however, such periods are the exception and the recent spike in volatility has been a less welcome reminder that the greater returns available from investing in stocks has historically come with greater variability.

While some people seek out stomach-turning thrills at amusement parks, most of us don’t care to experience such “excitement” with our hard earned money. At times like this, it’s worth remembering that generally speaking, the only people that get hurt on roller-coasters are those who try to jump off during the ride.

We encourage clients to remain focused on their long-term goals that remain unchanged amidst the current market volatility. We’ve strived to structure your diversified portfolios to meet these goals with consideration to current risks and opportunities as well as the variability of equity market returns that is more the norm.

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.


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

Implications of Populism

Why the anger? It’s the economy

One of the many notable characteristics of this unconventional presidential race is the broad-base populist uprising from both the left and right.  Across the U.S., pockets of workers are fed up with dead-end jobs and stagnant wages.  This anti-trade theme has resonated across both parties and will likely force changes in government policy, no matter who wins the election.

The primary cause of frustration is that workers across the U.S., especially those younger and less skilled, have faced falling standards of living since the Great Recession.  A McKinsey report[ref] Poorer than their parents? A new perspective on income inequality
By Richard Dobbs, Anu Madgavkar, James Manyika, Jonathan Woetzel, Jacques Bughin, Eric Labaye, and Pranav Kashyap, McKinsey Global Institute, July 2016 [/ref] estimates that 81% of the U.S. population experienced flat or falling incomes from 2005 to 2014.  The report shows similar results internationally with over 65% of households in 25 developed economies facing flat or decreased real income during the same time period. This equates to over 540 million people worldwide whose quality of life has not improved, many of whom are voicing their anger in elections.  As we see in the U.S., these concerns are being integrated into both parties’ platforms.  One only needs to look at Britain’s surprise Brexit vote to understand that these ‘new’ political forces should not be taken lightly. Continue reading