Stocks fell for the fourth straight session on Friday after the U.S. and China upped the heat relative to import tariffs.

The U.S. announced new tariff schedules for up to $50 billion in goods with some being started in two weeks and others to begin in four weeks. China essentially matched those totals. If there was some good news it was that stocks managed a modest rally late Friday to soften the decline but futures this morning are down again. While the media suggests the cause is trade war fears, we should note that stocks had moved toward the top end of the 2018 range by early last week. Several sheepish attempts to break through to new highs failed and, as a result, stocks began to retreat back toward the middle of the range.

Besides the weakening technical factors, last week saw an expected increase in short term interest rates announced by the Fed that served to further flatten the yield curve meaning the spread between short and long term rates narrowed. The benefit of higher rates, normally seen as positive for the banks, was more than offset by the small resultant spread achieved by borrowing short and lending for longer periods of time. Thus, bank stocks had a poor weak.

Oil stocks had an even worse week as Russia talked of increasing production by as much as 1.5 million barrels of oil per day. From the rhetoric at least, Russia appears to have had enough with production restraints. OPEC is holding a series of important meetings this week in Vienna. The actual conclave of OPEC members to decide on future production quotas begins on Friday. Russia, a non-OPEC member but one of the world’s big three producers, will join the discussion on Saturday. It appears the range of possible scheduled net production increases could end up anywhere from 0.5mm barrels per day to almost 2.0mm barrels. But one should also note that if the U.S. imposes sanctions on Iran, that country will almost certainly experience a decline in production at the same time Venezuela continues to see rapid declines. Finally, U.S. Permian production growth is constrained due to the lack of pipeline capacity necessary to move oil and gas from the Permian is west Texas to key distribution points. Oil prices are now down 12% from recent peaks and show no signs yet of stabilizing.

It hasn’t been a remarkably good political week for the White House either. While the escalation of verbal hostilities between the U.S. and other G-7 members cooled, it hasn’t stopped the administration from moving forward to implement more tariffs against Canada, Mexico and our European allies. The escalation toward a possible trade war with China certainly hasn’t helped. The administration almost certainly hoped that threats of tariffs would create some movement toward completing NAFTA, get Europe moving to reduce some tariffs on U.S. products, notably autos, and help accelerate trade talks with China. That still may prove to be the case but, to date, all that appears to have happened is an escalation in the rhetoric. But, as we all know, these battles don’t tend to get solved until the proverbial 11th hour. This week will be important to see if any progress might be forthcoming or whether we get closer to the point of no return and the imposition of worldwide tariffs. Our trade adversaries, being no fools among them, know where to counterattack with tariffs of their own in a war to maximize political pain to the incumbent Republicans. Roiling the base just before election season starts isn’t something the White House wants to see. It has the summer to fix the problem.

Of course, the other political maelstrom the Administration faces is the immigrant crisis along our Southern borders. While Mr. Trump, via his tweets, has tried to deflect the problem to the Democrats, this is one time that tactic isn’t 2

likely to work. The President has not backed down from his zero tolerance policy for immigrants entering illegally but, clearly, he has to come up with a solution that minimizes the separation of parents and children. He meets with Republican leaders tomorrow to discuss just that. While the heat will only increase between now and then, if a solution can be found, the ferocity of the attacks, politically can be defused at least to some extent. In Mr. Trump’s defense, at times when you try to extricate a country bound in gridlock and endless red tape, you achieve some unintended consequences. These can’t be ignored and a quick fix is mandatory. I suspect at least a temporary fix will appear this week.

The immigration issue directly isn’t a market moving event but the number of immigrants coming into the country is relevant. To the extent that population growth slows, the slack will have to be picked up through improved productivity. There is every indication that is happening. Productivity could well exceed 2% in the second quarter for the first time in a long time. The stock market is not a proxy for current economic activity. Right now, the economic picture in the U.S. is about as good as it gets. GDP should be well above 3% this quarter and it could reach 3% for the year. Unemployment is still falling and there are more jobs available to today than there are unemployed workers. Inflation remains tame. Could tariffs, change all this? The answer, of course, is yes and some industries will be hurt more than others. The tariffs announced to date probably won’t do considerable damage but any escalation beyond what is already announced could jeopardize the economies of not only the U.S. but all of Europe and North America. Most expect the actual actions to come up far short of the rhetoric but if there is one thing certain in a Trumpian world, it is that nothing is certain.

Today Blake Shelton is 42. Paul McCartney turns 76.

James M. Meyer, CFA 610-260-2220

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