As you know, this holiday is for celebrating the Labor Movement and the contributions workers have made to our nation’s history. But in recent years, as our society has grown ever more automated and modernized, we sometimes think we forget how important labor still is.  

Each month seems to bring new stories about the latest innovations in artificial intelligence, robotics, or digital technology. But there are so many things we could not function without – things we often take for granted – that wouldn’t exist without laborers.  

As financial advisors, we work a white-collar job. Every day we rely on computers to do what we do best. And yet, we could not perform our job without labor. The roads we drive on to get to work are made by laborers. The food we eat is grown, harvested, and prepared by laborers. The clothes on our backs, the shoes on our feet, the roofs we live under – it’s all thanks to hard work and no small amount of skill.  

Laborers harness the power of the Earth, the sun, the wind, and the oceans to provide the energy we consume each day. They mine the elements that go into everything from streetlights to the smartphone in our pockets. They build, repair, and reuse. Laborers keep our cities clean and functioning smoothly. They even plant the trees we rely on both for oxygen and for natural beauty! We often don’t notice them, because they work behind the scenes, or at night, or even in faraway lands. But the fact remains that we still rely on the sweat and skill of workers around the world.  

As another Labor Day rolls around, it’s important to remember that. It’s important to be grateful for the things we take for granted. It’s important to remember that many laborers still work backbreaking jobs, in harsh working conditions, for very little pay. It’s important to remember that the labor movement – the cause to ensure workers are treated fairly, safely, and humanely – is still going on today. So, while we celebrate another Labor Day, let’s remember how important labor is and always will be. Our civilization would be nothing without it.  

On behalf of everyone here at Minich MacGregor Wealth Management, we wish you a safe and happy Labor Day!

When Twitter first launched back in 2006, its creators probably never imagined that a single “tweet” could make the stock market plunge. But that’s exactly what happened on Thursday, August 1, when President Trump tweeted the following:

…the U.S will start, on September 1^st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%…”¹

Before the tweet went out, the Dow was up over 300 points. The S&P 500 was also having a good day. By the late afternoon, however, the Dow ended up down almost 300 points.² That’s quite a swing. 

Of course, it wasn’t really the tweet itself that made the markets dip, but the news it contained. As usual, the markets reacted to the announcement of more tariffs with a fit of violent sneezing. So, investors must now ask themselves, “Is this just a brief allergic reaction…or the first symptom of a market cold?” 

Let’s break it down. 

The “what” and “why” of tariffs

Here’s a quick review of the basics. A tariff is essentially a tax on imported goods. The business doing the importing will pay the tariff, usually as a percentage of the goods’ total value.

Many economists believe, however, that it’s consumers – people like us – who end up paying the cost of tariffs. For example, back in 2018, President Trump placed a tariff on imported washing machines. One study found that consumers “bore between 125 and 225 percent of the cost of washing machine tariffs”, mainly because the companies that sold the machines ended up charging far more for them to make up for what they lost in tariffs.³

So, why impose tariffs at all? Some economists argue there are lots of reasons. For instance:

Protecting domestic industries. When imports are more expensive, the thinking goes, consumers – both individuals and other companies – are more likely to buy from domestic companies that produce the same goods at a lower price. For instance, the U.S. has put tariffs on sugar imports dating all the way back to 1789!⁴

Revenue. Historically, tariffs were once one of the nation’s largest sources of revenue. However, tariffs-as-revenue have largely been replaced by other taxes, especially income and payroll taxes. 

Geopolitical negotiating. Tariffs – or at the least, the threat of them – can sometimes be used to drive countries to the negotiating table. That’s probably the single biggest reason President Trump has relied on tariffs so much, as he has persistently used them to persuade countries like China, Canada, and Mexico to negotiate more favorable trade deals. 

So, are tariffs good or bad? It’s unclear. Some economists claim they’re worth the cost. Others believe tariffs aren’t effective at doing what they’re supposed to do and just end up hurting consumers far more than they help. And since the American economy is based largely on consumer spending, these economists believe tariffs ultimately do more harm to the economy than good. 

Since we are financial advisors, not economists, we won’t come down on one side or the other. Far more pressing for us – and for all investors – is how tariffs affect the markets.

Tariffs and the markets

Since 2018, President Trump has announced new tariffs on Chinese goods on several occasions. Each time, a market drop has typically followed. You only have to look at the most recent announcement to understand why. 

As the President tweeted, the U.S. is imposing a new 10% tariff on $300 billion in Chinese goods. This new list includes everything from smartphones to toys to shoes.⁵ It’s no surprise, then, that the stocks sold off on August 1 were largely for companies that sell these products. As we just discussed, companies must pay more for the goods they need or sell, which can significantly eat into their profits. This, in turn, can lead to shipping delays, supply chain problems, higher prices for consumers, a resulting loss of business – you name it. All these issues, of course, are then reflected in the stock prices of the various companies affected. 

Despite this, each of the market drops we mentioned earlier tended to be mere blips on the screen. Some blips lasted longer than others, but in each case, the market sneezed, then moved on. (Or upwards, as the case has been.) The world we live in moves with astonishing speed, and for the markets, the next bit of news often seems to crowd out the previous bit. Those who have predicted doom and gloom with each new round of tariffs are still waiting. Since the overall health of the economy remains strong, it will likely take more than a few tweets, or even a few hundred billion in tariffs, to make the markets truly sick. 

The danger of complacency

All that said, there is a danger here. It’s the danger of becoming so accustomed to these here today, gone tomorrow blips that we forget to remember it’s the long-term health of the markets that matters. 

Every day, we’re bombarded with short-term news stories that cause short-term reactions. The fact that a single tweet can move markets is proof of that. But repetition often leads to desensitization. Sometimes we wonder if investors will become numb to events like we saw on August 1st. We sneeze, and when nothing else happens immediately, we move on. 

As always, though, the long-term is more important than the short. In this case, it’s possible we haven’t actually felt any long-term effects yet, just as we don’t usually feel the symptoms of a cold until the virus has been inside us for some time. Are there long-term effects to come? We don’t know – nobody does. It is important to note, however, that this round of tariffs is a little different than the previous ones. Older tariffs were largely on products like plywood and polyethylene. Important, but not very conspicuous. The newest tariffs President Trump has proposed involve more of the things we use on an every-day basis. Smartphones, for instance. Shoes. Clothing. Things we tend to notice and appreciate just a bit more. What happens if they go up significantly in price? Would that mean anything in the long run? 

It seems needlessly pessimistic to say that it definitely will. On the other hand, it also seems hopelessly naïve to say that it definitely won’t. 

It’s also possible that older tariffs will become more painful the longer they go on. Some data suggests that many companies have decided to eat the higher costs that come with tariffs rather than passing them onto consumers. But how long will that last? 

The point of saying all this, is not to suggest that these new tariffs, or tariffs in general, will bring a definitive end to the bull market we’ve enjoyed for so long. In fact, we think the chances are high that the markets will once again absorb the news, sneeze, and move on. Tariffs, as important as they are, represent only a small portion of the total economy – and the economy still looks strong. And of course, President Trump’s strategy could yet pay off and lead to a new, more favorable trade deal with China.

As financial advisors, though, we are adamant that we avoid feeling complacent about it. While it’s a mistake to overreact every time the markets dip, it’s also a mistake to stop paying attention. 
Our diagnosis, then: A sneeze is usually just a sneeze. And the August 1st market dip is likely just a market blip. But we will keep paying attention to everything we can – the markets, the economy, and yes, even Twitter if need be – in case a blip ever turns into anything more.   

As always, please let us know if you have any questions or concerns. We love to hear from you. 

¹Twitter account of Donald J. Trump, August 1, 2019. https://twitter.com/realDonaldTrump/status/1156979446877962243?s=20

² “Trump Threatens New Chinese Tariffs, Rattling Investors Across Markets,” The Wall Street Journal, August 1, 2019. https://www.wsj.com/articles/trump-to-impose-additional-10-tariff-on-chinese-goods-11564681310

³ “The Truth About Tariffs,” Council on Foreign Relations, May 16, 2019. https://www.cfr.org/backgrounder/truth-about-tariffs

⁴ “The Taxation of Sugar in the United States, 1789-1861. The Quarterly Journal of Economics. https://www.jstor.org/stable/1882993?seq=1#metadata_info_tab_contents

⁵ “Trump says he will go ahead with new China tariffs that would hit iPhones and toys,” CNN Business, August 1, 2019. https://www.cnn.com/2019/08/01/economy/new-china-tariffs-threat-trump/index.html

There’s a saying that you shouldn’t mix business with pleasure. Far less well known is the concept of never mixing personal finance with politics. 

Unless you’ve been living in some remote corner of the world without access to the internet, you’ve probably heard something about Robert Mueller’s testimony before Congress, the first round of Democratic primary debates, and other political developments. And no doubt you have an opinion on all these things, just like most people. We certainly do. But political opinions and financial facts rarely make good bedfellows. 

Here’s what we mean. Shortly before the midterm elections last year, a client asked us a political question. “Before we answer,” we replied, “are you asking us as your friends, or as your financial advisors?” 

You see, the answers are not the same. That’s because, as financial advisors, our job is not to manage your portfolio or financial plan with a political bent. There are two main reasons for this. First, let’s look at: 

Politics and the Markets

These days, most people tend to be very passionate about their political beliefs. But the fact is, neither party tends to have much impact on the markets compared to the other. Historically, the Dow has gone up an average of 9% every year a Democrat lives in the White House. With Republican presidents, the number is 6%.¹ (Note, these numbers do not yet factor in President Trump’s time in office.) The difference between those two numbers is small and can be attributed to a whole range of factors, not just politics. 

Even major geopolitical events rarely have much effect on the markets. Or rather, they rarely have a sustained effect. 

For example, take the case of “Brexit”. When the United Kingdom voted to leave the European Union back in June of 2016, it took most investors by surprise. The day after the vote, the Dow fell over 600 points, and then another 250 points a few days later. ² But before even a month passed, the Dow recovered – and even climbed to a new record high.³

Now, we are not saying politics do not influence the markets, because they do. The point is, politics tend to have far less of an effect than people think. In fact, if you were to make a list of things that consistently move the markets one direction or another, politics would be far down the list. 

For that reason, when listing all the reasons for making a financial decision, politics should be far down that list, too. 

Political Bias

It doesn’t matter whether you are liberal, conversative, or something in between. As human beings, we all have biases and blind spots. 

That’s the second reason why it’s unwise to mix politics with personal finance. You see, when we do that, we run the risk of becoming selective as to which facts and data points we consider. Without even realizing it, we often gravitate towards the ones that seem to confirm our existing beliefs. We rationalize why this bit of data matters – because it feels right, it must be right! – and why that bit of data doesn’t. 

To put it bluntly, making financial decisions based off biased or overly narrow information is dangerous to our long-term goals. You certainly wouldn’t want your financial advisor to do that. We certainly don’t want you to do that, either. 

Moving Forward

The reason we’re telling you all this, is because we are on the verge of moving into a new election cycle. That means we’re all about to be subjected to a dizzying assault of political news, analyses, and opinions. Everywhere you turn – from TV to radio, from Facebook to the yardsigns in your neighborhood – will be saturated with it. 

Of course, that’s not necessarily a bad thing. After all, we live in a representative democracy, and a democracy lives or dies by the participation of its people. So, as we enter a new political season, we encourage you to have opinions. Express them. Get involved. Just remember that your financial decisions should stand on their own, free of any angst or worry that politics might cause. Don’t make important decisions based on which candidates you think will win or should win. Base them on sound financial planning and actual financial facts. 

Most importantly, always remember that we are here if you have any questions or concerns. 

¹ “How the Presidential Election Will Affect the Stock Market,” Kiplinger.com, March 1, 2016.http://www.kiplinger.com/article/investing/T043-C008-S003-how-presidential-elections-affect-the-stock-market.html

² “Dow plunges over 600 points as U.K. ‘earthquake’ crushes global markets,” CNN Money, June 24, 2016.http://money.cnn.com/2016/06/23/investing/eu-referendum-markets/index.html?iid=EL

³ “Stocks have never been higher,” CNN Money, July 12, 2016.http://money.cnn.com/2016/07/12/investing/dowstock-new-high-record/index.html

After months of relative quiet, the trade war between the U.S. and China has erupted again in a big way. The markets are the most immediate casualty, with the Dow plunging over 600 points on Monday alone.¹

In all likelihood, you’re probably more focused on things like spring cleaning, your upcoming summer plans, and the end of Game of Thrones. My job in this letter is to briefly explain what’s going on, what matters, what doesn’t, and why you can go back to focusing on those other things.  

So, here’s what’s going on:

Failed deals lead to new tariffs

You may have noticed that headlines about the trade war had been rather muted in 2019. That’s because negotiators for both nations had been quietly working behind the scenes to come to an agreement on how to address the $375 billion trade deficit the U.S. has with China. The White House expressed optimism that a deal was close – until a sudden hardening of positions prompted both sides to retreat to their corners.  

On Friday, May 10, President Trump raised the stakes by placing 25% tariffs on all Chinese imports that had previously been spared. Here’s how the U.S. trade representative put it:

“[The President has]…ordered us to begin the process of raising tariffs on essentially all remaining imports from China, which are valued at approximately $300 billion.”²

Throughout this trade war, it has seemed like both countries are waiting for the other to blink first. Both are still waiting. For on Monday, May 13, China announced it would raise tariffs on $60 billion in U.S. goods, some up to as much as 25%.³ 

Why all this matters to the markets

You’ve heard, of course, of the principle of cause and effect. If one thing happens, something else is affected. Fail to brush your teeth and you get cavities. Leave meat out of the refrigerator too long and it will spoil. You get the idea.  

Investors, analysts, money managers, and traders who participate in the markets on a daily basis make decisions based on cause and effect. How tariffs impact certain companies is a perfect example of this.  

For instance, imagine a fictional American company called Widgets n’ Stuff, or WNS for short. In order to make its widgets, WNS buys thingamajigs from China. But thanks to tariffs, the price of importing thingamajigs goes up.  

Investors know this, and thanks to the principle of cause and effect, predict it will have a negative impact on WNS’s finances. Maybe they’ll have to raise prices on their own widgets to make up the difference. Maybe they’ll have to produce fewer widgets. You get the idea. So, investors sell stock in Widgets n’ Stuff because it no longer looks like an attractive investment.  
Like them or not, tariffs act as a double-edged sword that affect companies and consumers on both sides of the Pacific. On the American side, China’s tariffs can make it harder for U.S. companies to sell their goods to Chinese consumers. At the same time, American tariffs can make it harder for U.S. companies to import the goods they need for their own products. Either way, prices go up, corporate finances suffer, and consumers are often the ones left to foot the bill.  

That’s why the markets care about the trade war.  

But here’s why all this doesn’t matter to us – yet

The principle of cause and effect is important, but here at Minich MacGregor Wealth Management, we rely more on another principle: supply and demand. You see, as investors, we rarely know what the long-term effects of something actually are. Too many investors, in fact, rely on pre-conceived narratives to guess at the effects – and guessing isn’t really a viable strategy in life, is it?  

The fact is that the markets have fallen after almost every round of tariffs, only to recover a few days later. So, because we can’t really predict the long-term effects of this trade war, let’s ignore the narratives and focus on what we can control. By using technical analysis, we can look at the various investments in your portfolio to determine whether demand is higher (meaning the price is likely to go up, trade war or not) or whether supply is higher (meaning prices are likely to trend down).  

In short, we’re not going to make decisions because of the trade war in and of itself. We’ll continue making decisions by tracking trends – and trends are driven by many factors, not just what’s in the news on a given day.  

Hippocrates once wrote that, “To do nothing is sometimes the best remedy.” For that reason, it’s okay for you to go back to planning your summer vacation or betting which character will die next on Game of Thrones. In the meantime, We will continue monitoring our clients’ portfolio. If the dynamics of supply and demand change, we’ll make decisions accordingly.  

As always, please let us know if you have any questions or concerns. We’re always happy to speak to you!

¹ “Dow plunges 700 points after China retaliates with higher tariffs,” CNN Business, May 13, 2019.https://www.cnn.com/2019/05/13/investing/dow-stocks-today/index.html

² “Trump Renews Trade War as China Talks End Without a Deal,” The NY Times, May 10, 2019. https://www.nytimes.com/2019/05/10/us/politics/trump-china-trade.html?module=inline

³ “After China Hits Back With Tariffs, Trump Says He’ll Meet With Xi,” The Wall Street Journal, May 13, 2019. https://www.wsj.com/articles/china-to-raise-tariffs-on-certain-u-s-imports-11557750380