Market Commentary

Weekly Market Comment

“The art of living is more like wrestling than dancing, in so far as it stands ready against the accidental and the unforeseen, and is not apt to fall.” ― Marcus Aurelius, Meditations

The TSX composite dropped by 1.6% while the S&P 500 fell by 2.0%.

This week the markets were mostly reacting to what Jerome Powell, the new chairman of the US Federal Reserve, and Donald Trump were saying (or tweeting). Powell said that the US has become stronger since the last summary of economic projections, released in December. In the fourth quarter it grew by 2.5%.

The tax reform suggested and carried on by the Trump administration will stimulate the economy, Powell says. The headwinds that the US economy faced before the pro-growth measurements were put in place have now turned to tailwinds. Low unemployment means that workers can spend more confidently, and that is good for the economy. Higher paychecks, expected as a result of the tight labor market, won’t hurt either.

Despite Powell’s seemingly positive overview, markets got spooked. What triggered them was his forecast for gradual interest rate increases. The markets interpreted that as a hawkish stance—and continued their bumpy ride that started at the end of January. The US dollar jumped on bets of higher rates, and yields shot up, while some stock sectors fell, like real estate and utilities. These are seen as bond-like by investors due to their focus on providing income. On Thursday, Powell told the Senate Banking Committee that he doesn’t see signs of overheating in the US economy. Addressing trade, he said that it is currently a “net positive” for the US.

The White House disagreed, and promised to introduce import tariffs in an attempt to protect US-based producers of steel and aluminum. The markets focused on that for the rest of the week. The Trump administration proposes a 25% levy on steel imports and a 10% tariff on aluminum. Adam Posen, president of the Peterson Institution for International Economics, said that while negative effects of the tariffs will be widespread, they will help only a fraction of the US companies and workers. In 2015, about 140,000 people worked in steel mills, which contributed about $36 billion to the US economy, according to CNBC. Consuming steel and using it as input in their own production process, though, are companies employing 6.5 million American workers and creating about $1 trillion of value. New tariffs were cheered by steel producers like US Steel, of course, but the overwhelming consensus seems to be skeptical about their long-term effects. Canada, which is a major trading partner of the US, will seek exemption from the tariffs. Justin Trudeau quoted on Friday the facts that Canada is the USA’s key military ally and we actually import more steel than we export to the US. (It’s Canada’s exports that may be subject to the new tariffs.) Trading is not a zero-sum game where the country that runs a trading surplus is the “winner” and the one that buys more than it sells is the “loser.” However, trade wars can create economic damage, and, ironically, significant damage can be done to the nations who consider themselves to be “winning.”

Another development that we’ve been watching this week was the release of the 2018 federal budget. It was the third one put together by the Liberal federal government. Unsurprisingly, it projects budget deficits to run over the next several years. This, coupled with somewhat slower economic growth projected for Canada, will put pressure on the loonie. Along with welfare announcements like the government’s plans to start discussing a potential national pharmacare plan and the introduction of new parental sharing benefits, the budget did not deliver a lot of surprises in the area of personal and business taxes. The former didn’t change, the latter are going lower as planned. In 2018, small business tax is going down to 10%; next year, it will decrease to 9%.  Among the newly introduced taxes was a somewhat higher tobacco excise duty. Each cigarette will now cost about $0.011468 more. It’s never been a better time to quit!

Musings Beyond the Markets

How much would you pay for a bar of chocolate? $5? $50? How about $300?

A company called To’ak Chocolate is focused on delivering its customers best-in-class product—and charging them an arm and a leg for it. It took clues from the wine industry, which places a lot of emphasis on the origin of its products and the stories that surround it. But don’t let us spoil you all the delicious details. The story of the company itself is well worth your time. Read it here.

Word of the Week

Mansuetude (n.)—the quality or state of being gentle. “While Barbara was swimming to meet the dawn, Miltoun was bathing in those waters of mansuetude and truth which roll from wall to wall in the British House of Commons.” — John Galsworthy, The Patrician, 1911

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