Trade: A war or a skirmish?
International trade became a concern when President Trump announced tariffs on steel and aluminum produced overseas. Later in March, he stepped back from those plans, but announced new tariffs on China. The markets recovered from the decline following the first tariff announcement. However, the Dow dropped again in late March with the announcement of tariffs on Chinese goods.
We don’t expect trade to pose major risks to the economy or the markets. We may experience short-term ups and downs over trade negotiations, but revising previous trade agreements could be positive for the economy over the long term. U.S. trade with Mexico had a smaller economic impact when North American Free Trade Agreement (NAFTA) was originally negotiated, and it may merit a new look.
According to the Bank of America Merrill Lynch Global Fund Manager Survey released in March, 30 percent of investment fund managers saw a trade war as the greatest risk to the market. We do expect more market volatility around this issue. However, we think the markets in 2018 will be most affected by corporate earnings, which we expect to be strong.
Strong job market
The employment market grew stronger during the first quarter. The U.S. Bureau of Labor Statistics’ Employment Situation reported February’s 313,000 new jobs ranked as the best month in two years. The unemployment rate remained at 4.1 percent, and could soon fall below 4 percent, a level last reached in December 2000.
Markets are watching for signs that high employment is driving up wages. Wages grew at a 2.9 percent rate in January, which drove stocks down sharply with worries about inflation. But wage growth came in at 2.6 percent in February, easing those fears. The market remains nervous about inflation,* and continues to view every economic statistic in light of what it indicates for higher prices.
Job creation remains strong, but wages remain muted