Recent headlines have focused much on the Trump administration’s decision to place tariffs on steel and aluminum imports into the United States. While only time will tell what the true impact will be, we thought we’d share our thoughts on how these new tariffs may impact the markets. But first, let’s review what a tariff is. A tariff is effectively a tax placed on imports into the United States. They serve a few purposes, including; to punish the exporting country, to protect U.S. based industry, and to generate tax revenue. So, what’s with this new tariff on steel and aluminum of 25% and 10%, respectively? Well, it’s a movie we’ve seen before – but this time with a different cast of characters. In 2002, President George W. Bush enacted the U.S. Steel Tariff of 2002 which he subsequently dropped in late 2003 due to fears of retaliatory action from the European Union. Later, in 2009, President Obama placed a 35% tariff on tires imported from China – but as a result, Americans ended up importing tires from countries other than China, resulting in higher prices for tires. We suspect that now, much as in 2002 and 2009, the current tariffs may negatively impact the economy but to a limited extent and not to the point of triggering a wide-reaching economic downturn. As we move forward, we will be keeping a close eye on the NAFTA negotiations – but an even closer eye on the reactions of our trade partners who are
impacted by the newly placed tariffs.
PREDICTING A RECESSION?
On March 5th, the Federal Reserve Bank of San Francisco published their economic outlook. In reading through the document, I was struck by something they observed and documented in their report: every U.S. recession over the past 60 years was preceded by an inverted yield curve. An inverted yield curve (chart 3), occurs when short-term interest rates are higher than longer-term rates. A year ago, the yield curve was upward sloping (chart 1), which is considered normal. Currently, the yield curve is flattening (chart 2) but it hasn’t yet inverted.
So, will the yield curve invert in the near future? And if so, will it lead to the next recession? The answer is: maybe. It’s possible that the Federal Reserve may hold off on raising rates due to fears that the curve will flatten and ultimately invert. It’s also possible that long-term rates could tick higher and maintain the upward sloping shape that a normal curve exhibits. While we don’t have a crystal ball, we are preparing for this potential event by suggesting that investors reduce their exposure to longer term bond investments and instead, consider bonds with shorter-maturities. We also think this is an opportune time for investors to review the risk they’re exposed to across their entire portfolio. and consider rebalancing to an appropriate allocation. I’ll close this section with a saying I’ve heard countless times over my career in wealth management which hopefully underscores the need to stay on top of your portfolio allocation…. “if you don’t rebalance your account – the market will do it for you.”
By now, you are likely in the midst of filing your taxes – or working with your tax professional to do so. Listed below are a few questions we recommend asking your CPA/tax professional as you wrap up your 2017 returns:
- Am I eligible to contribute to a Traditional IRA, Roth IRA, or SEP IRA? If not, does it make sense to convert a part of my Traditional IRA to a Roth?
- What else could I be doing to help mitigate the impact of taxes?
- Do you recommend that I explore a Donor Advised Fund?
- What impact do you see the new tax reform having on my taxes for 2018 and beyond?
We are here to talk if you have any questions or concerns. As always, thank you for your trust, confidence, and friendship.
Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. Contributions to a Donor Advised Fund are irrevocable. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Past performance may not be indicative of future results. Investing involves risk and investors may incur a profit or loss. No investment strategy can guarantee success.