An Economic Forecast: The Jobs Report, Tariffs, and Bear Stearns

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Mar 8, 2018 3:19:40 PM

and tagged Commentary

Leave a comment

economic forecastI woke up this morning to a surprise. It had snowed, which was expected. After all the fear-mongering coverage, in fact, I expected the house to be covered, but it wasn’t so bad. The real surprise was the fact that a combination of wind and heavy snow had taken down several trees—including an 18-footer right across most of my driveway. All of a sudden, I was cut off.

Calm before the storm?

There was no suggestion yesterday that this would happen, as the weather was clear. Sure, we knew the snowstorm was coming, but here in New England, snowstorms are usually no big deal. Towns have the equipment, training, and expertise to deal with them quickly and efficiently. Conditions yesterday were good, so the tree across my driveway was a big surprise. On the roads in to work, I saw many more trees down, including along major roads where you simply don’t see that sort of thing. Clearly, the towns were taken by surprise as well, despite all that experience and preparation.

As I eventually drove in (after clearing the tree from my driveway with hand tools and swerving to avoid the trees on the road), it occurred to me that this was a pretty good extended metaphor for where we find ourselves today. With the jobs report expected to come in very strong tomorrow and with confidence high for both consumers and business, people feel good and see no real troubles ahead. The market remains close to all-time highs. The sense is that while there are indeed potential problems headed our way, they won’t really be that bad—and that we have the tools, the training, and the expertise to deal with them efficiently. In other words, the economic and investment consensus is much like how I felt about the weather yesterday.

Tariffs: Unsettled weather ahead?

There is even a pending storm out there to make the metaphor complete: the tariffs on steel and aluminum, which are scheduled to be announced this afternoon. Yes, the narrative goes, this will be a problem, but it is one that can be dealt with. Surely it won’t be that bad, right?

In the sense of this snowstorm, where the snow was actually not the problem, the tariffs might well not be a problem either. They will certainly raise costs for companies that use steel or aluminum, which is pretty much every manufacturer, but that could be dealt with. What will cause trouble? The downed trees and power lines, which no one can predict. Driving past and under trees along the road to work, I don’t know what the economic equivalent would be, and I am not eager to find out.

I did make it into work today. So, while there were unexpected risks from the storm, they weren’t that bad—and that could end up happening with the tariffs. Recent history, however, shows there is real potential for a much worse outcome.

Past storms: Bear Stearns

It was almost 10 years ago (Tuesday, March 13, 2008) that Bear Stearns collapsed, initiating the great financial crisis of 2008–2009. Well-intended policy decisions, in this case involving the accounting treatment of assets—combined with an extended economic and financial environment—detonated a crisis that we are still recovering from 10 years later. While the financial environment is much more secure now, and the economy is not as extended, we are at the end of a bull run for growth and stocks that is similar to then. The potential for small changes—and the tariffs are a large change—to have disproportionate and unexpected effects is very real.

Extended forecast

To be clear, I don’t expect—and am certainly not predicting—another 2008. What I am saying is that the present good conditions don’t reduce the risks here; they increase them. We will be watching closely to see how this plays out.

5 Ways to Affiliate
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

In The News

Don't Ignore the Dow's Discards
The Wall Street Journal, 06/21/18

RIP General Electric
Advisor Perspectives, 6/20/18

How Rising Interest Rates Impact the Market [Video]
CNBC, 06/14/18

Kudlow will return to the White House
Politico, 06/14/18

Fed Hikes Rates, Indicates 2 More to Come This Year
ThinkAdvisor, 06/13/18

More

Conversations

Subscribe via E-mail

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®