Invisor Economic Update Image July 2018-

Economic Update July 2018: Tax Breaks and Trade Uncertainty

by Blake Whiteley Last updated on August 07, 2018 Tags: Market & News Updates

US economic reports released in July showed increasing strength, breaking past the 2% real growth rate which has been somewhat of a norm since 2009. Real growth is up 2.8% in the past year, while real GDP growth in the second quarter alone grew at 4.1% annual rate which is its fastest pace since 2014. Wages and salaries are growing at its fastest pace in nearly a decade and, as a result, consumption numbers are also solid. The strong economic data can be attributed to tax cuts and increased government spending. 

The strength in the US economy will allow the Fed to be able to continue to raise interest rates without fear of choking off activity. Two more rate increases are expected this year.

Index performance_July 2018-1*Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index

Mixed Data in Other Parts of the World

Continued strength in the US economy could have spillover effects for the rest of the world, but for the time being, global economic data has been mixed. Here in Canada, GDP has expanded by 2.6% in the 12 months that led up to May, fuelled by growth in mining, quarrying, and oil and gas extraction. But growth in the eurozone has slowed to 1.4% –  the slowest it’s been in the past three years – and Chinese manufacturing recently fell to a five-month low. Despite the fact the that the strengthening US economy will aid global growth, US trade policies have planted a seed of doubt that is a key catalyst to the mixed data.

Trade Wars Abate Slightly, but Continue to Pose Risk

As we’ve mentioned in the past, the global economy is fueled by free trade. Many economies are export-driven, especially emerging economies like China. The shakier returns since the spring are due to global trade concerns stoked by President Trump. However, we feel that the real goal of the White House’s protectionist threat is to ultimately reduce trade barriers. Last week, this idea gained some merit as EU commissioner Jean-Claude Juncker and President Trump turned down the heat on their trade dispute by signaling that they will hold off on further tariffs and work towards eliminating them altogether while they work through their differences.

Despite the threat of elevated tariffs between the US and China, the market has breathed a slight sigh of relief on the back of the EU-US trade prospect. 

The effort to set aside differences with the EU will allow the White House to focus its energy on China; they’re planning on more than doubling the size of the original proposed tariffs to 25% on $200 billion of Chinese exports. China will likely take their own retaliatory measures if these threats are to materialize. This gives us good reason to expect continued volatility in equity markets.

Portfolio Diversification is Key!

Finally, a major headline in equities markets this month was that Facebook shares fell 19 percent in a single day, which translated into a loss of market capitalization of $119.4 billion USD: the largest ever one-day loss in value for a US traded company. This is what is known as an “unsystematic risk”, one specific to a company rather than the overall market.

Unsystematic risks paint a perfect picture of the benefits of diversification, which means not concentrating your portfolio on any one given company despite how well it’s done in the past. By creating a well-balanced portfolio, we eliminate this concentration risk and can ride out the waves of volatility that ripple out after a shock like this one. 

Stick to the plan, stay diversified, and don’t put too much stock in your Facebook news feed.

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