The Markets

Why am I saving and investing?
After a week like last week, it’s an important question. There are many reasons people save and invest, including to:
 

• Live the life they want today and in the future
• Accumulate resources so they’re prepared for any bumps in the road
• Provide an education for their children
• Offer assistance to parents
• Support a young person with a disability
• Do good in the world
• Live comfortably in retirement without anxiety

 
However, none of these reasons have anything to do with short-term market fluctuations.
 
Last week, major U.S. stock indices experienced a selloff, and we saw a dramatic downturn in stock markets. The Dow Jones Industrial Average was down 5.7 percent, the Standard & Poor’s 500 index lost 6 percent, and the NASDAQ fell 6.5 percent, reported Barron’s.
 
Those are big moves for a single week. The kind of moves that light up the emotion centers of investors’ brains and make them want to sell.
 
It’s not a new phenomenon. In 2002, in an article for CNN Money, Jason Zweig explained the brain’s potentially negative influence on investment decisions, “But in the world of investing, a panicky response to a false alarm – dumping all your stocks just because the Dow is dropping – can be as costly as ignoring real danger. For one thing, it can cause you to flee the market at a low point and miss out when the market bounces back. A moment of panic can also disrupt your long-term investing strategy.”
 
So, what happened last week? In short:
 

• The Fed raised rates, as expected. The Federal Reserve raised the Fed funds rate by a quarter of a percent, which may benefit savers and investors, but will make borrowing more expensive.
• Tariffs triggered trade war worries. The Trump administration levied tariffs on China, raising concerns of a global trade war.
• You’re fired! There was additional turnover among senior advisers to President Trump.
• Can they do that? British news reported a data analytics firm has been influencing elections around the world in some unsavory ways.
• Don’t share my data! There was news a social media firm had shared the personal data of thousands with a researcher who shared it with a third-party firm without permission.
• Sigh. Another data breach. An online travel company experienced a data breach that may have exposed the personal information of 880,000 users.
• The economy is chugging along. Last week’s U.S. economic releases were overshadowed by everything else, but many indicated a strengthening economy, reported Barron’s.

 
That’s a lot to take in over the span of five days. The critical thing is to recognize these short-term events are unlikely to change your long-term financial goals. Financial decisions, including buying and selling investments, are important and can be life shaping. They should be grounded by long-term financial goals and foundational principles of investing. They should not be based on the brain’s instinctive fear and flight response.

The Markets
 
It’s a good time for a gut check.
 
Last week, after sliding lower for four days, the Standard & Poor’s 500 Index recouped some of its losses on Friday. The reasons behind the week’s poor showing were diverse. Barron’s reported:
 
“The market is so discombobulated right now that it can’t even decide what it’s afraid of. What do we mean? When the Standard & Poor’s 500 index suffered its first correction since the beginning of 2016 last month, the cause was easily identified – a good old-fashioned inflation scare caused by a larger-than-expected increase in wages and a rapidly rising 10-year Treasury yield, which almost hit 3 percent…Fast-forward more than a month and those fears seem almost quaint.”
 
Those fears included:
 

• Special Counsel Robert Mueller’s subpoena of the Trump Organization.
• The effects of recent tariffs and the possibility of trade wars.
• The departure of Secretary of State Rex Tillerson.
• The Atlanta Fed revised its GDPNow Forecast downward for the first quarter of 2018. Weakness in consumer spending, net exports, and inventory investment offset gains in private fixed-investment growth.
• The Commerce Department reported weak retail sales for the third month in a row. Economists had expected sales to rise.

 
Here’s the thing: During 2017, volatility settled at historically low levels and stock markets charged ahead. As a result, it was relatively easy for investors to become sanguine about risk. You could say 2017 made investing seem as mundane as driving across the flatlands of the Plains states. It’s possible 2018 will be more like traveling icy switchbacks through the Rocky Mountains.
 
No matter what happens in the months to come, it’s a good time to reassess your risk tolerance and make sure it aligns with your financial goals and asset allocation.

The Markets
 
It’s a bird…It’s a plane…It’s a labor shortage!
 
There is little doubt the Millennial generation has been reshaping our world. One of the most remarkable aspects of this demographic group is a preference for experiences over consumer goods. “Three out of four millennials would rather spend their money on an experience than buy something desirable. This “experience generation” is now a third of the U.S. population,” reported Eventbrite.
 
Well, a new experience has arrived – a labor shortage in the United States.
 
Last week, Barron’s reported, “Across the nation, in industries as varied as trucking, construction, retailing, fast food, oil drilling, technology, and manufacturing, it’s becoming increasingly difficult to find good help. And, with the economy in its ninth year of growth and another baby boomer retiring every nine seconds, the labor crunch is about to get much worse…This, of course, is how a labor market works: Production rises, workers get scarce, and employers raise wages to attract employees.”
 
Currently, the population of the United States is growing faster than the U.S. workforce, reported Barron’s. It’s a state of affairs that occurred twice during the last century (1948 through 1967 and 1991 through 1999) and was accompanied by labor shortages both times. This time, Baby Boomers’ retirements may exacerbate the situation. Some estimates suggest the current labor shortage could last through 2050.
 
Despite low unemployment and high demand for workers, wage growth slowed in February.
 
There is a wild card in play, however. Many Americans prefer to participate in the workforce through the Gig economy. Gig workers have temporary jobs or freelance rather than working for an employer. MBO Partners reported, “Independents are the nearly 41 million adult Americans of all ages, skill, and income levels – consultants, freelancers, contractors, temporary, or on-call workers – who work independently to build businesses, develop their careers, pursue passions, and/or to supplement their incomes.”
 
The government has yet to figure out how to measure the Gig economy. When it does, a clearer employment and wage picture may emerge.
 

The Markets
 
As Yogi Berra once said: It’s déjà vu all over again.
 
Last week, global stock markets took a bit of a dip after President Trump announced a 25 percent tariff on steel and a 10 percent tariff on aluminum. Tariffs are taxes on goods imported from other countries. In general, governments impose tariffs to enhance revenue and/or protect domestic industries from competition abroad.
 
Tariffs tend to spark fierce debate about protectionism and free trade. Proponents suggest tariffs may protect domestic companies and create jobs. Critics suggest tariffs may slow economic growth and drive prices higher.
 
Here’s the thing: tariffs don’t always produce the anticipated results. Let’s take a look at two examples while keeping in mind that World Trade Organization (WTO) rules do not allow countries to impose new tariffs unless they are ‘safeguards’ intended to protect a domestic industry.
 
In 2002, President George W. Bush imposed a tariff on steel. While the WTO was deliberating about the action, “…the European Union ended up hitting Bush where it hurt. The bloc planned tariffs on a wide range of products, including many produced in key swing states where job losses could hurt Bush’s chances of re-election,” reported Time. The WTO eventually decided the tariff was illegal. Eventually, in 2003, the tariff was removed.
 
In 2009, President Obama imposed a safeguard tariff on Chinese-made tires. China retaliated by restricting imports of American chicken feet (a culinary treat in China), reported The Economist. At the time, U.S. exports of chicken appendages were valued at about $278 million. Guess what happened?
 
Far fewer Chinese tires were exported to the United States. However, tire imports from South Korea, Thailand, and Indonesia doubled, more than offsetting the decline in Chinese-made tires, reported the Council on Foreign Affairs. On the other side of the tariff tiff, U.S. poultry exports to China fell, but U.S. poultry exports to Hong Kong rose. As they say, when one door closes, another door opens.
 
In the big picture, it’s unlikely U.S. tariffs on steel and aluminum will have significant impact on China, the reported target of the new steel tariffs. After all, China ranks eleventh on the list of nations sending steel to the United States, reported National Review. Most U.S. steel is imported from U.S. allies such as Canada, Mexico, and South Korea.