April 2018 Overview

Macro Overview

Markets were rattled in March as a looming trade war between China and the U.S. enhanced
market volatility. The administration announced $60 billion in tariffs for Chinese imports,
with a detailed list of products which will be identified by the Commerce Department in
April. China threatened to retaliate by imposing tariffs on U.S. imports as well as curbing U.S.
Treasury purchases.

Intricate supply chains have evolved between the United States and China over the past
twenty years. Some U.S. manufacturers ship U.S. made components to China for final
assembly, then ship finished products back into the U.S., thus posing a challenge as to how
trade deficits are calculated.

Key economic data released over the past month revealed that key data points were the
strongest reported since 1998. The market has become much more dependent on data as it
looks for signs of inflation and rising rates. Various analysts view current market volatility
primarily driven by non-systemic events and isolated to specific events and individual
company news.

A key lending benchmark, the Libor, has been rising steadily. The three-month U.S. dollar
Libor rate surpassed 2% in early March, the highest level since 2008. Based in London, the
Libor affects U.S. consumer loans, commercial loans, and adjustable rate mortgages.
Rapidly rising mortgage rates are dampening the hopes of families eager to lock in rates
before payments start to become too expensive. The continued lack of housing supplies has
added a double cost factor to the market, with prices elevating due to tight supplies and
rising mortgage rates.

The International Energy Association (IEA) projects that the United States is on track to
become the worlds single largest oil producer by 2023. The estimates are based on
production growth and supplies generated by U.S. energy producers over the next few years.
U.S. daily oil production alone is expected to reach over 12 million barrels per day by 2023, a
20% increase from the current levels of 10 million barrels per day.

Congress reached a $1.3 trillion budget deal that will fund the federal government through
September. The extensive 2,232 page bill averts a government shut down and funds special
programs for child care, infrastructure, medical research, opioid abuse prevention, and
national security.

The IRS audited roughly 0.05% (half of one percent) of the 195,614,161 returns filed for tax year 2016. The number of examinations, also know as audits, was higher in the mid 1990s, when about 1.7% of returns were audited.

Sources: Dept. of Commerce, Bloomberg, congress.gov

Tech & Tariff Influenced Volatility – Equity Update

Technology stocks led volatility in the first quarter, pulling other sectors into trading frenzies. Over 25% of the S&P 500 Index is currently comprised of technology stocks, having added volatility to the index for the first quarter. Trade war rhetoric added to volatility as U.S. companies sensitive to higher import prices on raw materials and certain finished goods experienced pullbacks.

Companies in the technology sector faltered as privacy concerns drove social media shares lower. The
technology sector has also became more prone to volatility leading to gyrating valuations. In addition,
news of heightened regulatory rules for technology and social media related companies escalated a sell off heading into the second quarter.

Transportation stocks are rising more closely with the rest of the market, an optimistic signal according to the century old Dow Theory.

Sources: Dow Jones, S&P, Bloomberg.

World’s Largest Consumer Markets – Global Commerce

The United States by far has the single largest consumer market of any country worldwide, representing over 26% of the entire global consumer market. U.S. consumers spent over $12.5 trillion in 2017, nearly three times as much as the second largest consumer market, China. China’s consumer market is currently one of the world’s fastest growing markets, with nearly $4.5 trillion in consumer expenditures.

International companies selling to the U.S. marketplace are attracted to the enormous wealth that
consumers have access to in the United States. Ample and readily accessible credit sources in the U.S. also allow consumers the ability to purchase a wide variety of products.

Emerging market economies such as India and Brazil not only have a growing consumer market, but also benefit from exports to the U.S. Whereas, developed economies such as Japan and Germany have shrinking consumer markets yet depend heavily on exports to the United States.

Demographics has been a driving force in the U.S., as baby boomers provided an enormous amount of activity among various sectors and industries for decades. Now, as baby boomers retire and exit their prime spending years, it is up to younger consumers to create and replace much of the wealth needed to maintain consumption expenditures.

Sources: World Bank Group, United Nations Statistics Division.

The Growing Trade Deficit With China – International Trade Policy

Over the past twenty five years, China has evolved from a heavy equipment and machinery exporter to a prominent leader in technology product exports. Large international conglomerates have established an enormous manufacturing presence throughout China, utilizing its cheap labor and quick turn around times. China’s manufacturing plants are among the most modern in the world, producing large capacities almost entirely for export.

As the world’s appetite for electronic devices has grown, so has China’s ability to manufacture and export these devices. As a product exporter, China is able to manufacture and export finished products worldwide. In addition, China is also an exporter of components, which may be used in the manufacture and assembly of products in other countries, such as the United States. By exporting components in addition to finished products, China is able to hedge against tariff issues and labor costs should they become a factor.

Trade with China has grown tremendously over the past 30 years, from nearly a trade balance in 1985 to a trade deficit of $375 billion in 2017. Imports from China were $506 billion while U.S. exports to China were $130 billion, thus an ensuing trade deficit. Ironically, China’s purchases of U.S. government debt has helped maintain a low interest rate environment, thus reducing loan rates allowing U.S. consumers to finance more expensive Chinese imports such as big screen TVs, cell phones and computers.

Sources: WTO, IMF, U.S. Dept. of Commerce, FRED.