By: Brent Schutte, Northwestern Mutual
Stocks gained with the major indices finishing higher for the week thanks to a solid jobs report and a relatively quiet week of tariff news. What little news there was in trade negotiations was viewed as mostly positive, with President Trump and Chinese leader Xi Jinping participating in a phone call and Trump agreeing to visit China at some point in the future. While no details of a trade agreement emerged from the discussion, investors viewed the conversation as a welcomed de-escalation of tensions with China, which began to build shortly after the two countries agreed to a truce in early May to their ever-escalating tariffs. Optimism about the thawing of relations with China offset the doubling to 50 percent levies on all steel and aluminum imported into the U.S. that took place in the middle of the week. The increased tariffs were announced the prior week after the Court of International Trade struck down the tariffs implemented under the International Emergency Economic Powers Act (IEEPA). The ruling was later temporarily halted by an appeals court.
With tensions easing and the courts now beginning to weigh in on the legality of some of the proposed levies, many investors have begun to believe peak tariff uncertainty has passed. That belief, coupled with the resiliency of hard economic data, has led many to conclude that risks to the economy are beginning to recede. Indeed, last week’s headline number from the Bureau of Labor Statistics Nonfarm payroll report was viewed as a sign that the economy has so far been left unscathed by tariffs.
While it may turn out that some of the president’s other economic policies, including lower taxes and loosening regulations, may provide an offsetting tailwind to tariffs (which are largely viewed as being a drag on the economy), we think it is too early to conclude that economic risks have begun to ease. As we’ve noted in previous commentaries, surveys, or so-called “soft data,” of businesses and consumers have been flashing warning signs for the past few months. While the weakness highlighted in those reports has not yet shown up in hard data in a meaningful way, we believe it is too early to conclude that it won’t eventually have an impact. Recent hard data has been volatile as businesses and consumers adjust their actions in anticipation of how trade policy will eventually play out. Simply put, some of the strong hard data we’ve seen in recent months likely was affected by purchases and business investments that were made to get in front of expected rising prices driven by tariffs.
Similarly, while we don’t expect future tariff developments to yield the level of surprise that the initial announcement of the reciprocal levies did in early April, we believe there are more twists and turns to come in trade negotiations and that the administration will not stray from its goal of using tariffs to recast the global economy and the role of the U.S. in it. Our caution should not be mistaken for pessimism. Instead, we believe that until trade negotiations are finalized and the economy has operated under the new more restrictive trade policies for a prolonged period, it will be difficult to gauge the ultimate net impact of the administration’s policies. For that reason, we expect the Federal Reserve will take a wait-and-see approach when it comes to rate decisions as it seeks to avoid acting too soon before the full impact of the president’s efforts to remake the global economy are known. Unfortunately, that means that current high interest rates will continue to be a headwind for some parts of the economy.
Despite these challenges and the unpredictable nature of current trade negotiations, we do not believe investors should make dramatic changes to their investment plans. Instead, the current environment serves as a valuable reminder that an unpredictable future will lead to unpredictable opportunities for investors in the intermediate and long terms. And capitalizing on these unforeseen opportunities is best done through diversification.
About the Author:
Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.
