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Finally. It took a while but we finally got our first down month in the equity markets. 2017 had many historic metrics, one of which was the rarity of going through an entire year where the S&P 500 and Russell 3000 both experienced a positive return in 12 of the 12 months of the year. In fact excluding February this year, since November 2016 both the S&P 500 and the Russell 3000 posted positive return months every single month. 15 in a row! To put that into perspective, since Y2K we usually get one down month for every two positive (36% of the time); and the best positive streak we got in that same timeframe was less than half at 7 months1.
The equity markets both near and far posted healthy losses for February with the S&P 500 and Russell 3000 coming in at -3.69%, the Dow Jones Industrial Average coming in at -3.96%, and the MSCI World ex USA (AKA the rest of the world) posting a solid -4.75%. Even the U.S. bond market (measured by the Barclays Aggregate US Bond Index) came in at -0.75%1.
I won’t go into much detail about the correction that happened at the beginning of the month. If you want information about it you can read my two Intra-Month updates HERE and HERE.
The main concern in the market is the recently announced trade tariffs on steel and aluminum. Trade tariffs are a normal part of negotiation and historically presidents have used this tactic to keep relations with other countries on equal footing. Typical negotiations start with one country tariffing another for very specific products that will affect the other country, and the other country responds by doing the same back. These then get worked out and dissolved over time and the tariffs go away. The main concern in our current administration is that they feel there is already a disproportionate fairness to trade with the US. Trump’s tariff on steel would seemingly affect China as they are the largest producer of steel in the world (approx. 50% to 80% depending on who you read). However when looking at how much of our steel imports come from China, only a fraction (3%) is direct2,3. China has been long accused of dumping steel because of its excess capacity, creating monopolistic markets and hurting the steel producers in other countries (like the U.S.). The downside is that U.S. steel jobs have suffered between automation and importing cheaper steel. Additionally, it creates a vulnerability to China in the event they would use their exported steel to create national security issues in other countries. The upside is that manufacturers in the auto industry, construction, and appliances are able to build cheaper4,5. This has been a highly politicized topic and the clarity of the true ultimate effect on the U.S. economy is not easily understood. Whether China is dumping steel in the U.S. and other countries or not, this looks like the beginnings of a long-established negotiating tactic and the results on the economies and the markets remain unclear.
We will continue to watch the development of these trade negotiations and fully expect a more volatile market as a result. These are usually times that investors should look past the dreary headlines and find what areas of the market are oversold. Fundamentals continue to show health in our economy and in our capital markets, so we have not changed our outlook for the end of the year.
A reminder, if you have missed any of our Month-In-Reviews you can find them archived on our website at https://www.aghwealth.com/p/month-in-review.
Thank you for your trust and confidence.
LPL Financial Advisor
Vice President, AGH Wealth Management
1 Morningstar Direct™
2 LPL Research Weekly Economic Commentary, dtd March 5th, 2018 – claims 80% steel production from China (sourcing Bloomberg)
3 According to http://money.cnn.com/2018/03/02/news/economy/steel-industry-statistics-us-china-canada/index.html Worldsteel reprts that 50% of world production comes from China.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. All indicies are unmanaged and may not be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.