What To Do With The Trade Deficit – Weekly Update for February 13, 2017

The political world has presented much conversation lately, but one topic has had Americans’ attention since campaigning season: tax reform. Last week, President Trump announced that a tax plan is forthcoming, and domestic markets responded by reaching record highs. In fact, we saw positive market performance even before the announcement, as the S&P 500 and Dow posted new records two days in a row, while the NASDAQ reached record highs every day except Monday. By Friday, the Dow was up 0.99%, the NASDAQ added 1.19%, and the S&P 500 capped its fourth consecutive week of gains to increase by 0.81%. On the other hand, the MSCI EAFE was down this week, posting a 0.03% loss.

In today’s highly politicized market environment, we understand that you seek insight on how changes could affect your financial life. While we could focus on potential policy or tax adjustments, many of these details are still unclear. Rather than addressing speculation, we prefer to analyze and share key data that we do have details on from last week: the trade deficit.

What happened? The most recent trade deficit numbers came in last week, showing that in December 2016 the following occurred:

Why should you care? As we discussed a few weeks ago, trade is integral to our economy—and we saw a decrease in net exports slow GDP growth in the fourth quarter of 2016. Essentially, when the U.S. imports more goods than we export, the economy may not perform as well.

However, analyzing the trade deficit is not a simple “lower is better, higher is worse” circumstance. In a healthy economy, the trade deficit can increase, as Americans’ incomes grow and they buy more imported goods. Understanding what signs are positive and which are negative can help you better know where we stand.

What can we learn from this week’s findings? The trade deficit is larger than a year ago, but the increases are less dramatic than what some headlines may imply. For instance, a MarketWatch article shared that “U.S. trade deficit hits highest level in four years.” But when you look at the changes on a graph, the difference may seem less extreme than the headline implies.

Ultimately, while the balance between imports and exports is meaningful, the volume of trade matters greatly as well. December’s increasing trade volume—both imports and exports—can show us that both U.S. and global economies are improving.

Looking ahead, changes to trade deals and corporate tax rates could have significant effects on the trade balance and volume. We will continue to evaluate this monthly metric to look for insight into our economy’s fundamental strength. As always, we will work to keep you informed so you know what is happening and how we are pursuing your goals in an evolving world.

ECONOMIC CALENDAR:

Tuesday: Producer Price Index
Wednesday: Consumer Price Index, Retail Sales, Industrial Production, Housing Market Index
Thursday: Housing Starts
Friday: E-Commerce Retail Sales

Remember What Happened May 6, 2010? Weekly Update – May 11, 2015

Image courtesy of FreeDigitalPhotos.net/renjith krishnan

Image courtesy of
FreeDigitalPhotos.net/renjith krishnan

In this week’s commentary, we want to draw your attention to a significant market anniversary. Five years ago, on May 6, 2010, the U.S. stock market experienced a “flash crash” when the Dow Jones Industrial Average plummeted nearly 1,000 points in minutes, erasing almost $1 trillion in market value. The Dow immediately reversed itself and regained much of the lost ground that day. The event, caused by a large institutional trading program, was the largest single day drop in market history and caused an immediate media frenzy.[1]

In the weeks after the crash, news outlets blazed with headlines like: “Mean Street: Crash — The Machines Are in Control Now” and “Was Last Week’s Market Crash a Direct Attack By Financial Terrorists?”[2] Fear mongering by talking heads led many investors to worry that they were outclassed by big traders. A London-based trader was indicted last month for contributing to the 2010 crash by placing fraudulent orders that helped spark the selloff.[3] Fortunately, the flash crash was a miniscule blip on the market radar and ended up having very little effect on most investors.

So, what have we learned in the five years since then?

Despite panics and flash crashes, financial markets are still functioning. You’ll always find someone to tell you that the sky is falling and markets won’t recover from some event. Though the past can’t predict the future, U.S. markets have survived panics, crashes, bubbles, and crises and risen again.

Today’s markets are volatile and unpredictable. Smart investors don’t worry too much about what markets are doing this week, this month, or even this year. Instead, they focus on their own financial goals and create strategies that can withstand challenging market environments.

Flash crashes (or some other minor event) could happen again. Today’s markets are flooded by orders generated by sophisticated trading programs and institutional investors. Though Congress acted swiftly to institute “circuit breakers” that pause trading in stocks that experience a violent swing, it’s possible that another confluence of events or intermarket feedback loop could cause a similar problem in the future.[4]

Since we can’t predict these “black swan” events, all we can do is build prudent strategies and carefully manage risk.

Things aren’t always as bad as the media makes them out to be. The media makes money on eyeballs and shocking headlines. It’s absolutely critical to both your portfolio and your mental health that you learn to tune out the noise and focus on fundamentals. One of the greatest advantages of working with financial professionals is that we keep an eye on economic and market events for you. We are also trained to take emotion out of the equation and make rational decisions in the face of market movements.

If you’re ever worried about where markets are going or have questions about how events affect your financial picture, please reach out to us. While we can’t predict markets, we are always available to offer reassurance and answer questions.

ECONOMIC CALENDAR:

 Monday: Factory Orders

Tuesday: JOLTS, Treasury Budget

Wednesday: Retail Sales, Import and Export Prices, Business Inventories, EIA Petroleum Status Report

Thursday: Jobless Claims, PPI-FD

Friday: Empire State Mfg. Survey, Industrial Production, Consumer Sentiment, Treasury International Capital

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HEADLINES:

Jobs rebounded in April. U.S. job growth surged in April, and the unemployment rate dropped to a multi-year low. Tempering the good news, the March report was revised to show that just 85,000 new jobs were created.[5]

Eurozone economy grew in first quarter. Despite worries about Europe’s weak growth prospects, experts believe that the Eurozone economy may have grown at a faster pace than the U.S. economy.[6]

Despite drop in sales, wholesalers increase inventories in March. Wholesalers, the firms that supply U.S. retailers, slightly increased their inventories in March in anticipation of Spring-led retail demand. Higher retail sales would spur restocking and boost their sales.[7]

Puerto Rico braces for austerity measures. Faced with financial shortfalls and $72 billion in public debt, the U.S. territory slashed its proposed budget and requested help in finding a solution to the fiscal crisis. If a solution is not found, the Puerto Rican government could stop debt repayments.[8]

 

Footnotes:

[1] http://money.cnn.com/2010/10/01/markets/SEC_CFTC_flash_crash/

[2] http://blogs.wsj.com/deals/2010/05/06/mean-street-crash-the-machines-are-in-control-now/, http://www.alternet.org/story/146793/was_last_week’s_market_crash_a_direct_attack_by_financial_terrorists

[3] http://www.usatoday.com/story/money/markets/2015/05/06/uk-flash-crash-trader-navinder-singh-sarao/70881770/

[4] http://money.cnn.com/2010/06/10/markets/SEC_circuit_breakers_rules/index.htm?postversion=2010061013

[5] http://www.foxbusiness.com/markets/2015/05/08/traders-cautious-ahead-april-jobs-report/

[6] http://www.cnbc.com/id/102665345

[7] http://www.foxbusiness.com/markets/2015/05/08/us-wholesale-stockpiles-up-slight-01-percent-in-march-despite-eighth-straight/

[8] http://www.foxbusiness.com/markets/2015/05/08/puerto-rico-braces-for-austere-budget-amid-warnings-financial-shortfall/