Tariff Threats Yet Still Record Highs

Tariff Threats - Again

Tariff Threats - I’m amazed at how the market isn’t reacting to the tariff threats President Trump is making since he has already implemented some small ones. At a campaign rally in West Virginia, President Trump repeated his threats to tax European cars.

He said, "We're going to put a 25 percent tax on every car that comes into the United States from the European Union." That would be terrible for the consumer which is already not liking the buying situation in autos.

Commerce Secretary Wilbur Ross stated in an article in the Wall Street Journal that the report on auto tariffs, which was expected to be released in August, was postponed.

He also didn’t set a new timeline because of ongoing trade negotiations with Mexico, Canada, and the E.U. This isn’t the first time everyone at the White House isn’t singing the same tune.

Another point Ross made was that the materials the automakers sent the government are taking longer than expected to review. Unsurprisingly, the auto companies are against the tariffs because they will increase costs for the consumer which will lower their sales.

President Trump has threatened a 20% and a 25% tariff in the past. The Commerce Department has been analyzing the effects of potential auto tariffs. The President asked it to review if auto imports are a threat to national security in May.

It’s an extravagant claim to say cars sold from allies hurt national security, but it can be used as justification since it was used as an argument to impose tariffs on aluminum and steel earlier in the year.

Tariff Threats and Record Highs Hit, But Record Close Elusive

The S&P 500 was up 0.21% and finally hit its record high on Tuesday. However, it still hasn’t hit its record closing high. It tied the record for the longest bull market ever. It should continue this record run as earnings look strong. However, there are a few negative catalysts lurking which I will discuss in this article.

The Russell 2000 was up 1.14% as it was a broad based increase. The CNN Fear and Greed index was 61 out of 100 which signals greed. The S&P 500 is about 10 points from its record high which means very little needs to go right for to get it there. That being said, I don’t expect major follow through because stocks are getting extended.

The consumer discretionary and industrial sectors did the best as they were up 0.89% and 0.75% respectively. The big winner in the consumer discretionary sector was TJX which was up 4.74%. It had a 34% increase in profits and same store sales growth of 6% which beat estimates for 2.2% growth.

The reports from the major retailers aren’t singing the same song as the weak consumer confidence report. That being said these firms aren’t selling houses or cars, which is where the weakness was in the University of Michigan report.

The worst sectors were real estate and consumer staples which fell 0.92% and 0.77%. General Mills was down 3.05% on no major news.

Tariff Threats and Q3 GDP Updates

I don’t look at the GDP estimates now to understand where the quarter will end up. I look at them to summarize the data which has been reported so far.

The St. Louis Fed Nowcast expects 3.69% growth which would be a continuation of the torrid pace in Q2. The NY Fed Nowcast was lowered from 2.57% to 2.39% on Friday as it continues its run of negativity. It was wrong in Q2 but that doesn’t mean it will be wrong in Q3. The biggest impacts on this estimate change came from housing starts and the Philly Fed index.

These two factors hurt the estimate by 13 basis points and 7 basis points respectively.

I will need to review the rest of the regional Fed reports to see if the NY or Philly one was correct. The Empire index helped the estimate increase 5 basis points.

Tariff Threats - As of August 15th, the Q3 estimate from the CNBC rapid update shows the average of 11 estimates expect 3.4% GDP growth. 

The Atlanta Fed GDP Nowcast expects 4.3% growth, making it the most optimistic. It’s amazing to see such optimism when the residential construction report caused the third quarter estimate for real residential investment growth to fall from -3.3% to -4.8%.

These estimates are disjointed at it seems highly unlikely that real residential investment will fall that quickly and GDP growth will be that strong.

It’s certainly possible, but it doesn’t make sense. That estimate is in place because such a small part of the data has been reported. If that came true, it would be the equivalent of predicting a baseball team will give up 10 runs in its next game, but it will win the game.

A very small percentage of games are won when the team gives up 10 runs.

The chart below shows the 4 quarter rolling GDP growth average and the San Francisco Fed’s forecast for future GDP growth. As you can see, the San Francisco Fed expects GDP growth to be just under 3% in 2018.

The establishment loves to keep forecasts near the trend which means they are bearish when growth is strong and bullish when growth is weak. It’s a fair perspective to have because growth hasn’t hit a permanently high plateau. I expect growth to decelerate into a recession in the next 2 years.

Tariff Threats - Conclusion

Stocks are at their record highs and I expect the year to end solidly. I am neutral on stocks which is a negative opinion in my perspective because earnings are so strong. I’m just nervous about a peak in growth as we’ve seen weakness in some data and the yield curve flattening.

The worries about a tariff threats and trade war were strong 6 months ago. Now they have disappeared even though tariffs are in place and President Trump is threatening bigger ones which will hurt the economy.

A 25% tariff on European cars would be a disaster for consumers who want to buy them.

 

Spread the love

Comments are closed.