Markets Shake Off China Tariffs
May 17, 2019
Trade continued to dominate headlines this week as China struck back with retaliatory tariffs on $60 billion of U.S. goods, effective on June 1st. This will impact more than 5,000 products and will increase the tariff level from a range of 5-10% to a range of 20-25%. China’s announcement comes on the heels of last week’s announcement the U.S. would increase tariffs from 10% to 25% on $200 billion of Chinese goods. Although markets tanked on China’s announcement on Monday, dropping 617 points, investors were able to shake it off by week’s end. For the second week in a row, markets focused squarely on the on-going U.S.-China trade deal, meaning that little attention was paid to this week’s economic reports. U.S. industrial production struggled during April as the trade war hit manufacturers. On a positive note, we did get some good news on the U.S. consumer as housing experienced a spring rebound. Retailers, on the other hand, struggled during the month as consumers took a time out from shopping after a strong March showing. After the initial shock of China’s retaliation wore off, the Dow rebounded strongly during the week to finish within 1.00% of last week’s close.
Trade War Hits Industrial Production
Manufacturers began to feel the heat from the U.S-China trade war as U.S. industrial production which reflects total production at factories, utilities, and mines fell -0.50% in April. The drop in manufacturing output in April was driven by a -2.60% decline in motor vehicles and parts. That was the third decline in four months for the industry. Output at utilities also contributed to the month’s decline, dropping -3.50% as demand for heating decreased because of warmer than normal temperatures. Manufacturers noted the impact of tariffs in April, with 59% citing higher production costs. With the trade talks in turmoil, this is a condition that manufacturers are likely to have to contend with for some time.
Homebuilding’s Spring Rebound
The spring rebound in housing continued in April as housing starts rose 5.70% to a seasonally adjusted annual rate of 1.235 million units, beating estimates of 1.205 million units. March data saw a large upward revision from a decline of -1.139 million units to an increase of 1.168 million units. In a sign of construction momentum in the months ahead, building permits rose 0.60% to a rate of 1.296 million units in April. The data suggests a strong jobs market and low mortgage rates. which have fallen from a recent peak of 4.94% in November to as low as 3.98% this week, are beginning to push prospective homebuyers off the sidelines and into the market. With the busy homebuying season now in full swing, housing looks poised to continue its rebound, providing a push to the economy.
Consumers Take a Time-Out
Retailers struggled to maintain March’s brisk sales pace as retailers reported sales fell -0.20% in April to $513.4 billion. The drop in sales was driven by a -1.10% decline in car sales which come on the heels of a strong March which saw sales increase 3.20%. Electronic and appliance store sales also fell in April, dropping -1.30% which reversed March’s 1.20% increase. Retailers face some formidable headwinds in the months ahead as the U.S. has hiked tariffs from 10% to 25% on more than $40 billion of goods imported from China. Merchants, and clothing retailers in particular, will face some tough choices between eating the costs and taking a hit to profits or passing the costs on to consumers and taking a hit to demand and sales.
Early in the week, markets looked poised for a sustained decline as China enacted higher tariffs and as anxiety rose over whether the trade war would stress U.S. economic growth. By week’s end, reason returned as investors took truer stock of the situation. Economists estimate that the most recently announced salvos of U.S. and China tariffs will hit China harder than the U.S. They estimate a -0.40% to -0.50% hit to China GDP, while the U.S. is expected to take only a -0.10% hit to GDP. The minimal impact is due in part to manufacturers re-configuring their supply chains to countries which are not impacted by the tariffs such as Malaysia and Thailand. Investors were also feeling more confident over the course of the week that the Federal Reserve would likely be inclined to cut rates if the U.S. economy were to show any signs of faltering. With interest rates being the larger macro force, much of the initial fear dissipated and markets ended nearly flat.
The Week Ahead
In observance of the Memorial Day holiday, our office will be closed on Monday, May 27th. Our next edition of Week in Review will return on May 31st with the second estimate of Q1 2019 U.S. GDP and the April report on international trade.
Spring Cleaning for Financial Paperwork
There is about one month left of spring, and the past few months have been spring cleaning time for many. Protecting your personal information as you purge is critical when tackling paperwork and financial documents. One of our financial planners, Whitney Magers, CFP®, advises clients of important considerations when tidying up your files. Personal information that appears on account statements, insurance statements, legal documents, bills, and other items needs to be protected and carefully disposed of. Here are some tips from Whitney:
Shred paper files. A cross-cut or micro-cut shredder makes it harder for opportunistic, would-be thieves to piece back together documents that may contain your personal information. Strip-cut shredders turn documents into long, vertical strips that can be reassembled relatively easily. Be sure to shred bills, receipts, bank statements, investment account statements, canceled or voided checks, medical records, and pay stubs.
Destroy old credit cards. Despite the fraud protection that many credit card companies offer, you should still shred old cards or cut them up and dispose the pieces in different places to eliminate the possibility that someone could use the information to either set up a new account or use your old card to run up charges. If your card comes with a chip, experts advise making sure the chip is destroyed as well.
Maintain “forever” documents. Items such as birth certificates, Social Security cards, marriage licenses, and more are items to keep indefinitely. These should be stored in a secure place with a digital back up throughout your lifetime.
Hold onto tax returns. Keep tax returns for at least seven years, however, some taxpayers should hold onto their returns longer depending on their individual tax situation. Your advisor can help you determine how long you should hold onto these files.
Consider setting up a digital document archive. Digitally scanning your documents and keeping them in a secure, password-protected file is a good way to store important financial documents. Some of these documents include life insurance paperwork, wills, trust documents, estate planning files, power of attorney, and medical directives. Your original documents should be stored securely in a safe deposit box, locked filing cabinet, or a fireproof/water-resistant home safe.
With identity theft on the rise, carefully disposing of documents containing your personal information and securely storing the “forever” documents is important for safeguarding yourself and your family from fraud.