Highlights
• Investors focused on the positives last week (particularly a strong February employment report) and bid stock prices higher.
• Markets did not react negatively to last week’s tariff announcements, but we see more downside than upside.
• Over the long-term, we are growing more concerned about what rising bond yields, tighter monetary policy and higher inflation could mean for stocks.
President Trump’s proposed trade tariffs dominated most of the financial headlines last week, but investors looked past the negatives to bid up stock prices. The S&P 500 Index rose 3.6 percent last week.1 Half of that gain came on Friday, following a strong labor market report that showed jobs increases but stable wages.1 For the week, industrials, financials, technology and materials were all up over 4 percent, while utilities lagged.1 Treasury yields also rose last week in the face of stronger economic data.1
Weekly Top Themes
1. Higher tariffs could potentially damage economic growth. Donald Trump’s proclamation of a 25 percent tariff on imported steel and a 10 percent tariff on aluminum contributed to political uncertainty. It drew sharp criticism from Republican leaders in Congress, played a role in Gary Cohn’s departure from the White House and raised the possibility of retaliatory action from other countries. We believe such tariffs are effectively taxes that can drive a wedge between producers and consumers, and are more likely to hurt economic growth and jobs creation than they are to help.
2. February’s jobs report points to economic acceleration. Payrolls growth showed an increase of 313,000 jobs, the highest level since June 2016.2 In addition, the overall labor force grew by 806,000, which kept unemployment at 4.1 percent and wage growth low at 2.6 percent year over year.2 On balance, the data showed that labor supply is currently keeping pace with labor demand, which should contribute to economic growth without causing significant price pressures.
3. Manufacturing data also pointed to solid growth levels. The Institute for Supply Management’s manufacturing index hit its highest level since 2004, while the nonmanufacturing index also surprised to the upside.3
4. A more competitive U.S. economy should help narrow a growing trade gap. The U.S. energy renaissance, narrower wage disparity between the U.S. and China and the effects of U.S. corporate tax reform should all help make the U.S. economy more dynamic and competitive.4 This, in turn, could help narrow the U.S. trade deficit as a percentage of U.S. gross domestic product.4