Welcome to the Paragon Podcast. In this episode Evan Shorten and Elean Mendoza discuss some of the major events that have occurred through the first half of 2019. Topics discussed include trade wars, tension in Europe, and the global economy.
Introduction: Welcome to the Paragon Financial Partners podcast, where we discuss the markets, our strategies, and how to live better today while planning for tomorrow.
Elean: Hello, and welcome to the Paragon Podcast. I’m Elean Mendoza and I’m here with the firm’s founder and principal, Evan Shorten.
Evan: Hello, and thank you for tuning in. It’s been a while since we posted our last episode, and we’re making a comeback. There’s been a lot going on in our economy and it’s important for us to bring you updates as the year progresses.
With that, I want to encourage you to subscribe to our podcast with the Apple Podcast app or Stitcher Radio. Don’t forget to sign up for our email list to stay up to date on our podcasts; blog posts from our Insights blog; and general announcements throughout the year.
Elean: You can visit our website at paragonfinancialpartners.com and sign up for our email list right on the homepage.
So, with that, let’s discuss some of the bigger themes around the world affecting markets; and let’s start with the big one on everyone’s mind which is the trade war. So, just to give everyone a reminder, the trade war actually started back on January 22nd, 2018, when president Trump placed a 30% tariff on foreign solar panels as the first policy action against China who is the world leader in solar panel manufacturing.
However, the trade war didn’t really gain traction and garner a lot of media attention until September of 2018 when Trump imposed 10% tariffs on Chinese goods and threatened to increase those tariffs to 25%. Adding significant friction to trade tensions was the arrest of the Huawei finance chief in Canada due to U.S. orders for potentially violating sanctions against Iran, and most recently, listing Huawei Technologies from doing business with U.S. firms. So, with that, what are your thoughts on the trade war and how much of it may be impacting markets?
Evan: Well, as a baseline, it’s clear that the trade tensions are impacting the global economy and the financial markets. The uncertainty around trade tensions is triggering businesses around the globe to delay capital spending, and in turn, this is likely going to show the weakest growth for the second quarter of this year compared to the last three years. Now, depending on how severe the trade tensions become will dictate if there’s any sort of rebound in the second half of this year. The power struggles between the U.S. and China have created a six-week downturn in domestic equity markets.
At this point, the S&P is down over 7% from hitting an all-time high just a few short weeks ago. In fact, the bond market is also making a pretty clear statement that the Fed best be on watch and ready to act with the 10-year dropping to a 20 month low, causing a pretty deep inversion of the 3-month T-Bill and the 10-year treasury to a low of 2.06. Now, as the Fed claims to be very data-dependent, global manufacturing data is showing that the second-quarter growth may be weaker than expected.
In April, consumer spending was flat, durable goods fell sharply, and the trade balances and goods were weak as imports and exports fell. If the trade war continues for an extended period of time without resolution, it’s likely that we’re going to be heading into a recession in the coming few quarters. On the brighter side, as the bond market has rallied, this has pushed interest rates remarkably lower in particular for mortgages.
So, even if you’ve refinanced your home over the last couple of years, you may be able to capture an even lower rate. I know several people who are locking in 30-year fixed rates at 3.5% or better. These lower mortgage rates will allow for greater monthly cash availability in the general consumer’s pocket, which may allow for a further pickup in consumer spending.
Elean: One observation that I really want to mention is that this trade war already has been going on for more than a full year, and in general, markets have been pretty resilient. While we can only speculate, if U.S. markets can maintain their resiliency, it’s possible this trade war can carry over until the very end of 2019 or even early 2020. I imagine President Trump will want to tout a big win against China in his reelection campaign. And trust me, no matter the outcome, this will be marketed as the biggest trade win in history.
Now, as of Thursday night, things changed a little bit. May 30th, Trump announced he’d be imposing a 5% tariff on all goods being imported from Mexico. That 5% tariff would start on June 10th and will be in effect as long as Mexico allows immigrants to cross into the U.S. illegally. Now, I’m not going to lie, this one caught me and a lot of people by surprise.
Evan: I’m not really sure why this caught you by surprise. Everything seems to be up for grabs with our current administration. New tariffs with Mexico have always been on the table – at least in theory. The administration has drawn a pretty clear line on their position and they’re not looking to back down. The bigger issue I see is that this isn’t just about a 5% tariff, or up to 25%, as it’s planned if the resolution isn’t agreed upon. The real issue is about avoiding a major roadblock in last year’s renegotiation of NAFTA and potentially ratifying the new trade agreement between U.S., Mexico, and Canada.
Elean: Finally, the last topic we want to cover is a potentially slowing global economy. For example, Germany posted low GDP growth in 2018 and the European economy is dealing with friction with respects to Brexit, the Yellow Vest Movement in France, and rising political tensions in Italy.
Evan: Europe, like the rest of the world, is not in great shape. It’s significantly impacted by China’s slowing growth, Brexit, and weak manufacturing numbers. It appears as many parts of Europe will continue to have the tepid growth this year. Companies are reporting higher revenues, but they’re not very optimistic. If trade tensions continue, or even worse, they escalate. Then we can see further erosion in the global economy. Prices will be increasing everywhere. Simply, this is because tariffs make economies less efficient by forcing countries to use more resources where they have no comparative advantage.
Elean: Now, it might seem counterintuitive, but one thing to consider is that poor performance in European and Asian equities can also be a positive for U.S. stocks, as U.S. equities are often seen as a safe haven for global investors during rough times. Now, for the sake of brevity, we’re going to end it here, but I encourage you to subscribe and stay tuned as we’ll be posting more podcasts, keeping you up to date with market conditions. You can subscribe to the podcast via the Apple Podcast app or Stitcher Radio. Thank you everyone who tuned in and we look forward to bringing you more content.
Evan: Yes, thank you again for tuning in and we appreciate the loyalty of our listeners.
Disclosures: Paragon Financial Partners Inc. is a registered SEC investment advisor. The broadcast is for informational purposes only and should not be considered as a solicitation or offer to purchase or sell securities. The financial strategies and guidelines discussed herein may not be appropriate for everyone as each individual circumstance is unique. Please review all tax information with your tax professional. Please review all legal information with your legal professional. We hope you enjoyed the Paragon Financial Partners podcast, and again, thank you for listening.