Gill Capital Partners March 2018 Market Commentary
What are we talking about at Gill Capital Partners?
Our Investment Committee meets weekly to review portfolio allocations, macro-economic events and our investment managers. Below are some areas that are top of mind within the committee.
Tariffs and trade wars
On March 1st, President Trump announced that he will enact across-the-board tariffs on imported steel and aluminum, a move that caught many by surprise. The final tariff plan was far less imposing than initially thought, as it excluded Canada, Mexico, and left out other close allies. The economic nationalists praised the move, while many economic and business leaders warned of job losses, weakening industrial competitiveness, and higher costs for businesses and consumers. There is news this week that the administration plans to impose other, and potentially more impactful, sanctions on Chinese goods and services in retaliation for what is being characterized as perceived intellectual property theft from American businesses. How impactful are these tariffs? And what do they mean for the investment landscape?
The news regarding tariffs is certainly a radical departure from the flattening global economy of the past few decades and represents a potentially important shift. Trade wars would be a negative development for the global economy as they would reduce trade and overall economic growth at all levels. However, at this point it appears to be posturing amongst global leaders and it is unclear what the actual result will be. We will continue to monitor this and how it may impact our global growth thesis.
Interest rates, inflation and a new Federal Reserve Chairman
Last month’s market correction was driven by inflationary concerns following some economic reports showing higher levels of inflation than we have seen in quite some time. This drove interest rates higher and spooked equity markets as investors feared accelerating inflation and the potential for significantly higher interest rates. Subsequent inflation reports have eased investor concerns as compared to the inflation reading that came out in early February. However, markets remain cautious around the potential for higher inflation.
Jerome Powell, the new Federal Reserve Chairman, made his first public comments earlier this month, which further assuaged investors’ fears. He indicated that he will largely look to continue recent Federal Reserve policies, and mentioned a tolerance for slightly higher inflation than their mandate of two percent.
We continue to watch inflation closely, and are seeing modestly higher readings, but they are still within the Federal Reserve’s comfort level. Furthermore, the inflation readings we are currently seeing have largely been priced into the interest rate markets, particularly on the short end of the interest rate curve, which is where interest rates have shifted dramatically. Longer dated interest rates, on the other hand, have not moved much at all, and we believe that investors holding longer dated bonds (10+ years) are susceptible to unwanted volatility and potential downside. We have positioned our client’s fixed income investments on the shorter end of the interest rate curve in reaction to this dynamic, as investors are simply not getting paid to take incremental interest rate risk on the longer end of the curve.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.