Recent goings on in Washington and the financial markets remind us (at least those of us who are old enough to remember) of a line in one of John Lennon’s hit songs titled “Nobody Told Me”. The line we refer to is “strange days indeed”. More on that later. The first three months of 2018 has been a wild ride, at least compared to the past few years of relative tranquility in the financial markets. The S&P 500 stock index blasted out of the gates with a 7% gain by the end of January, only to reverse course and give all of the gains up by the end of March. The economy is not to be blamed here as growth has been rather slow and consistent dating all of the way back to 2009 when the recovery first kicked in. Stocks (at least up until a couple of months ago) had been sailing along as well in a remarkably calm fashion and historically low levels of volatility. The winds of change are upon us.
There are many dichotomies happening in an economy that is said to be strong and resilient and poised for further gains. On the plus side, in a large portion of the Midwest companies are struggling to find qualified workers if they can find workers at all. Stories out of Iowa reference manufacturing companies turning away customers due to lack of man power. These companies are willing to pay and train kids right out of high school only to find no takers. Then there is the Recreational Vehicle capital of America, that being Elkhart, Indiana where the unemployment rate is essentially zero. RV sales have blown past the last peak set in 2006 and are over three times the level of sales in 2009. Wages have spiraled to $90,000 for assembly workers and over $100,000 for foreman, a lot of money by northern Indiana standards. Companies are offering signing bonuses for new employees to stay on board. For one month. $85,000 to $95,000 Ford Expeditions and Lincoln Navigators are flying off the lots. Dealers have little or no inventory. On the other hand, a recent study by a very reputable (by our standards) economics think tank paints a far grimmer picture. We all know borrowing, whether corporate, government, or personal has been strong and growing in the recent era of cheap money. Deeper analysis suggests that quite a bit of personal borrowing (think credit card debt) has not been for fancy new cars or to spruce up the house, but to finance purchase of basic essentials – food, energy, health care. This suggests a deeper structural issue where much of the middle class is being stressed just to pay their bills every week. The same study suggests that the U.S. economy cannot tolerate much of an increase in interest rates due to the level of debt already outstanding. Where an increase in rates from say 3% to 6% might not have harmed the economy much 20 years ago, today such an increase might be quite damaging.
Back to Mr. Lennon and another line from his song: “everyone’s a winner and no one seems to lose” harkens to the nice gains in the stock market in recent years and particularly those with an affliction to the largest technology or “FAANG” stocks. The market has been strong and the general economy seems to be in good shape and possibly getting stronger. Recent corporate tax cuts are allowing firms to drop more money to the bottom line without selling a dime more in product or services. But wait a minute, here comes Washington. As this letter is being written more tariffs are being threatened on China, far and above what was proposed just a week or two ago. China will not take this sitting down and will retaliate. None of this is positive. Tariffs do nothing but raise the price of goods and services that Americans use every day. Given the aforementioned stress many households are under to meet their obligations, higher prices are far from welcome. Remember wages are still growing at a fairly slow historical pace and certainly not enough to offset the higher prices that punitive tariffs might produce.
Making our jobs here at GSB Wealth tougher is deciphering all of the rhetoric coming out of Washington, not to mention the almost daily barrage of tweets. If I ever get fired I hope it isn’t via a tweet. We are good at analyzing the economy, setting client objectives, valuing individual stocks, etc. What is very difficult is to know whether a misguided tweet may cause the market to gain or drop 1000 points in any given day. That is why GSB Wealth adheres to high quality investments, sets reasonable client objectives, creates a solid long- term plan and sticks to that plan. Survey after survey has shown that trying to ”time” the market i.e. jump out then jump back in, is a losing proposition. Constructing a solid long-term plan with quality investments and sticking to that plan is the best means to an end. That is what we do.
As always, please contact us with any questions and/or concerns.
Your GSB Wealth Management team