Investment Insights: The New, New Deal

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Trade fears are on the mend as a radically new policy in Washington may be starting to work its magic.

Tractor in the middle distance with a watering attachment as it travels over a vast, planted vegetable field.The Trump administration reportedly reached a trade deal with Mexico on Monday, which sent markets higher on the news; the S&P 500 gained 0.78% for the day. After coming into office with the plan of renegotiating U.S. trade with essentially all partners, it seems President Trump is taking a step forward after a perceived stumble from tariffs and pressuring America’s closest allies on trade. Key elements of the deal revolve around the automotive industry, such as requiring autoworkers to earn at least $16 an hour and requiring at least 75% of a car’s value be manufactured in North America, according to a White House press release, up from 62.5% under the previous iteration of NAFTA. The current agreement will last for 16 years, but likely won’t go into effect until later this year or early 2019 as talks with Canada continue. This may spell trouble for the current administration if enough seats change within Congress during the midterm elections and depending on the final terms of the deal.

Trade relations between the U.S. and China, however, remain a bit less rosy. Domestic farm products have been hit hard by retaliatory tariffs set in place by China in response to a similar enactment from the U.S. administration. Fortunately for farmers, a bailout is on the way. The U.S. Department of Agriculture has reported that it will combine resources with the federal government to the tune of $6 billion in aid in order to support affected farmers, purchase certain targeted agriculture crops, and help develop international markets for farm products. The government is authorized to go up to $12 billion in support, if necessary. Soybean farmers continue to be the hardest hit after Chinese tariffs targeted the industry specifically. The U.S. is the largest producer and exporter of soybeans, according to U.S. Department of Agriculture, while China is, by far, the world’s largest buyer.

Geopolitics continues to be a key driver for financial markets as world leaders shape a new template for world trade and even diplomatic relations. Some of Trump’s recent polices vaguely parallel parts of the New Deal, the economic program put forth by Franklin Delano Roosevelt to support the U.S. after the Great Depression in the 1930s. While support for farmers and a reform of the banking industry – although in the opposite direction – feel dimly similar, the goal and outcome may be the same: political realignment. Regardless of the intention, supporting economic growth and cushioning any downturns should be key priorities for officials. Our team continues to see modest room for upside in stock markets, but risks continue to mount, along with Fed interest rates, as corporate earnings begin to taper toward more normalized levels.

Chart showing various market returns as of 8/28/18

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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

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