What's up Tariffs?

Dear Reader,


    
    Tariffs, the jobs report, psychology and discipline, the tax rate, saving versus investing, and college versus a job right out of high school.


The Market. Stocks rallied and bonds fell after the latest jobs data release. S&P 500 closed this week in the green, .24% 5-day yield to 2,734.62. Dow closed this week in the red, -.49% 5-day yield to 24,635.21. Nasdaq closed this week in the green, 1.62% 5-day yield to 7,554.33. Crude oil dropped -.51% this week to $65.71 per barrel. Gold dropped -.31% this week to $1,297.90. And the EUR/USD is at 1.16, just in time for holiday in Europe.




The trade war is back on! However, there is a hitch this time. Instead of going head to head with China, our Commander in Chief is imposing tariffs on steel and aluminum to Canada, Mexico, and the EU at 25% and 10% respectively. As expected, each nation and the EU have issued statements of retaliation. Canada has vowed to match the tariffs dollar for dollar on all sorts of goods ranging from lawn mowers to toilet paper, Mexico will slap tariffs on cheese, pork, and blue jeans to name a few, and the EU will impose tariffs on Harley Davidson motorcycles and Kentucky Bourbon. Put together, each of these nations account for over half of our imported steel and aluminum. What does this mean going forward? This could have a wide ranging effect on the overall economy. Although these tariffs will be helpful to the steel and aluminum companies, it is far more detrimental to those who use these metals, which far outnumber producers. For example, the API (American Petroleum Institute) is worried about the potential weakening of our national security. Oil companies use specialized steel in many of their operations and the tariffs would make domestic oil more expensive and this comes at a time when the price on foreign oil is at a major high. Additionally, industrial behemoths Boeing (BA.N) and Caterpillar (CAT.N) stocks are down 2.3% and 1.7% respectively. EU trade commissioner Cecilia Malmström has described the US tariffs as illegal under the WTO rules and described the agenda as “pure protectionism”. If the WTO finds the Trump tariffs to be illegal, the G7 counterparts will be allowed to impose billions in retaliation levies. The US Aluminum Association also disapproves of the new tariffs, claiming that the Trump tariffs are “potentially alienating allies and disrupting supply chains that more than 97 percent of U.S. aluminum industry jobs rely upon”. Only time will tell if the Trump Administrations macro-economic solutions will prove advantageous for consumers and industry, however, for the time being, this escalation of “America First” is undoubtedly putting a strain on international and industry friendships.  




Lowest point in half a century. With more people coming into the labor market and with employers taking more from the unemployment pool, the unemployment rate dropped to 3.8% this month, a 48-year low (The economy added 233,000 jobs in May). African American unemployment fell to a record low and the gap between white and African American unemployment narrowed.




Trading psychology and discipline. The ability to understand a company’s fundamentals and the ability ti determine the direction of a stock’s trend are key skills for a trader, but neither are as important as the ability to contain emotion and exercise discipline. Discipline will help with sticking to preplanned trading strategies and knowing when to take a loss or a profit. Quantifying fear will help with isolating and identifying feelings that can threaten your profit potential. Knowing how to deal with greed (“pigs get slaughtered”) will help you make rational decisions (not hanging on to winning positions for too long). Lastly, having rules and plans like creating a profit target, setting up a stop-loss order, and laying out guidelines on your risk-reward tolerance will help with mastering your psychological component to trading.




The tax rate. The Gaffer Curve shows the relationship between tax rates and the amount of tax revenue collected by the government (tax rate 0%, the government will earn no revenue and if the tax rate is 100%, the government will get all of the revenue). The less an activity is taxed, the more of it is generated and as taxes increase from low levels, tax revenue collected by the government also increases. But as tax rates hit a certain point peak, it would  cause people not to work as hard or not at all. So what is the proper tax rate and what is better: the “trickle down” strategy (tax breaks and benefits for corporations and the wealthy will trickle down to everyone else) or the “tax-and-spend” strategy?




Saving versus Return. There are two engines of growth in an investment portfolio: the rate of return generated by the portfolio and contributions made by the investor. Which has the greater impact? The answer is based on your age… Older investors should place a bigger emphasis on saving more than building aggressive portfolios with a higher risk of loss. Younger investors should focus on starting early, contributing regularly, and investing more aggressively.




Millennials are investing less. Younger Americans are still fearful of investing their money in stocks and only 37% of adults younger than 35 have money in the stock market. Lack of faith, an uncertain administration, and market volatility is the blame for this.


“Price is what you pay, value is what you get.” Starting valuation matters much less over much longer time frames. Investors should always be conscious of starting valuation when pacing bets. Dividend Discount Model (calculates the true value of a firm based on dividend payed), Discount Cash Flow Model (using a firm’s discounted future cash flows to value the business), and the Comparables Model (comparing the stock’s price multiples to a benchmark to determine if the stock is undervalued or overvalued) are good starting valuation methods to use.




College versus A job right out of high school. 40% of teenagers don’t enter college immediately and some don’t even graduate from high school. Teenagers have two options: either go the college route and get a degree and then get a job or skip college and go right for the job. Which one is better? Option 1 is great because of the education aspect, but it comes with hefty student loan debts and the uncertainty of not even being able to get a job out of college. Option 2 saves money and time, but it will not allow you to be institutionally educated and you have the possibility of being stuck with your minimum wage job (because you do not have a degree) if you can find a job.




Keep Climbing,
          The Alchanati Campbell and Associates Team