2018 1st Quarter Commentary

ALARMISM SELLS!

 

Yes, alarmism sells when you are trying to sell newspapers or air time on television and radio. However, it is not always helpful to us as investors. Lately, we are being told that we should be alarmed about the tariffs President Trump plans to impose against China. It is being referred to as the beginning of a trade war. China has a long history of hacking into companies in the United States, stealing trade secrets, and placing restrictions on us.

On Wednesday, 3/21/2018, the Dow closed at 24,682. On Thursday, 3/22/2018, the Dow dropped 725 points to close at 23,957. The headline in The Wall Street Journal (WSJ) on Friday, 3/23/2018 was, “Trump confronts China on trade. Dow plummets more than 700 points, fueling concern of further declines ahead.”

On Friday, 3/23/2018, the Dow closed at 23,533. On Monday, 3/26/2018, the Dow went up 669 points to close at 24,202. The headline on 3/27/2018 was, “Stocks rebound as trade fears end.”

What a tragedy it would have been if an investor had reacted to the first headline and sold. These headlines were talking about things that might happen. We think it is better for an investor to look at what is happening.

What the news media does not tell us is that the 725-point drop on Thursday, 3/22/2018, represents a -2.9% fall, and the 669-point rise on Monday, 3/26/2018, represents a +2.8% rise. Historically, 2-3% daily movement is fairly common on the Dow Jones Industrial Average.

The headlines make it seem like these tariffs and the possible trade war are very unusual. The fact is the WSJ reported on 5/19/2016 that President Obama had increased a tariff on China’s cold-rolled steel by 522%. CNN Money reported that in 2009 President Obama slapped a 35% tariff on Chinese made tires being sold in the US. The media is treating these tariffs as something very rare. The facts are that these things have been done before and shouldn’t be nearly as alarming as some would think.

The second example of alarmism is that every time the Federal Reserve Board meets, we are supposed to hold our breath about whether they will raise interest rates or not. The facts are that from 2009 to 2015, interest rates were held at virtually 0%. In those circumstances there was no profit motive for a lender to lend money. After the latest Federal Open Market Committee meeting, the Fed announced an interest rate hike of 0.25%, which leaves our current federal funds rate at 1.42%. They also announced that they anticipate 3 more interest rate hikes this year. We have seen alarmist headlines about what this might mean to investors and what it might mean to our ability for businesses to expand. However, the Federal Reserve has stated numerous times that it could not raise interest rates until the economy heated up. The fact that they are planning to raise interest rates multiple times in the coming year or two indicates that the Federal Reserve sees the economy continuing to expand. That is a good sign.

It is important that we put these interest rates into perspective. Over the last 64 years, from 1953 through 2017, there were times the interest rate was as high as 18% and there were times that the interest rate was at 0%. However, the average federal funds rate for that time period was 4.5-5.5%. It is very important to understand that the interest rate hikes which are currently going on are not trying to drive us into historically high territory. They are simply trying to get us back to normal. We believe that once the federal funds rate gets to 4.5-5%, that would historically be a reasonable interest rate for our economy. We shouldn’t think of it as hiking interest rates, but as normalizing interest rates which have been abnormally low for 6-7 years.

The alarmist headlines seem to always be prominent and they are almost always about what might happen. If you dig a little deeper, you will find some very good things are actually happening to the economy.

Recent facts stated in the Kansas City Star:

“U.S. Factory Output Jumped 1.2% in February”

“A Reassuring Fact: Rising Prosperity Around the World” 1/28/2018

“The U.S. economy grew at a solid 2.9% annual rate in the final three months of last year, a sharp upward revision that caps three quarters of the fastest growth in more than a decade.” Associated Press, 3/29/2018

Several quotes from the WSJ:

“Factory production rose last month” 3/18/2018

“Fed signals more aggressive path. New forecasts show officials project faster economic growth, higher inflation, and lower unemployment in the coming years.” 3/22/2018

Mother used to always say, “90% of what you worry about never happens.” She was right. It is usually best to keep our eye on the economy and avoid overreacting to “alarmism.”

 

Sources: The Wall Street Journal (WSJ), Kansas City Star, CNN Money, Yahoo Finance, St. Louis Federal Reserve Bank Economic Research