Time to Focus on Economic Indicators
From Larry Kudlow stepping in as the Director of the National Economic Council to Trump accepting an invitation to meet with Kim Jong-un, this week as been packed with eye-popping headlines. Get the details to these stories and more in this latest edition of Steady Investor’s Week.
Deconstructing Dodd-Frank – in the wake of the 2008 global financial crisis, lawmakers responded with a broad, complicated reform law (Dodd-Frank) intended to create tighter checks and balances on large banks in hopes of preventing the next major crisis. While well-intentioned, the law was arguably too complex and confusing – to the point where years after its passage, rules were still being written. This created uncertainty for banks, which in our view is just as negative for banks as new rules are. This week, however, the Senate achieved something you rarely hear about anymore in Congress: bipartisan support. In a 67 to 31 vote, the Senate agreed to ease the bank rules under Dodd-Frank, which many see as a significant first step in reworking the Dodd-Frank reform law. The new bill raises the asset level at which a bank becomes “systemically important” from $50B to $250B, which offers a bit of leeway to midsize banks. The new bill also exempts banks with less than $10B in assets from rules banning proprietary trading1.
Larry Kudlow Takes Top White House Economic Job – many readers have seen or heard of Larry Kudlow, a nearly two decades-long TV personality and economic pundit for CNBC. This week he was appointed by President Trump as Director of the National Economic Council, succeeding Gary Cohn for the White House’s top economic post. Kudlow’s career spans much further than his time on CNBC, as he also served as an advisor in the Reagan administration. Some of Larry Kudlow’s positions are widely known, based on his books and messaging as a TV host. Based on positions taken directly by Mr. Kudlow, we know he opposes estate taxes, as well as taxes on dividends and capital gains. He also suggests that employees should make greater contributions to their pension and medical costs, since these costs pose an undue burden on companies. Kudlow and Mr. Trump also see eye to eye on government regulation (less is more), and both firmly believe that reducing tax rates will encourage economic growth and ultimately increase tax revenue2. However, one sticking point that will be interesting to watch involves tariffs. Gary Cohn’s departure was largely seen as driven by his opposition to tariffs, but Mr. Kudlow has been quite outspoken in opposition to the tariff plan. He even penned on and wrote an op-ed for CNBC earlier this month that detailed his disagreements, stating that “steel and aluminum may win in the short term, but steel and aluminum users and consumers will lose,” adding that “in fact, tariff hikes are really tax hikes.”3
A Short-Term, Geopolitical Positive – Late last week, President Trump accepted an invitation from North Korean leader Kim Jong-un to meet to discuss denuclearization. The North Korean leader made the invitation in a letter hand delivered by South Korea’s national security adviser Chung Eui-yong, and Trump indicated that he would meet by May (though the time and place of the meeting is TBD). One key condition to the meeting that, in our view, serves as a positive: Kim Jong-un says he is prepared to suspend nuclear and missile tests between now and the meeting, much as they did during the Winter Olympics in exchange for sending a delegation. Of course, no one can be certain that Kim Jong-un can be trusted, but in our view, this meeting in the very least reduces the risk of war between now and when the meeting takes place, which can be viewed as a short-term, geopolitical event for markets.
Tariffs, Signed – late last week, President Trump signed an order imposing a 25% duty on steel and 10% duty on aluminum. However, many adjustments were made seemingly at the last second that soften the blow for many of our largest trading partners, specifically Canada and Mexico. They were excluded from the tariff barring a NAFTA collapse, and companies and other nations can apply for exemptions or reductions in the tariff on a case-by-case basis. The factor to watch regardless is how affected nations and regions react, and whether counter-tariffs are levied on U.S. goods and services.
Flying Taxis! If you had any doubt about the relentless spirit of innovation across the world, perhaps this story will provide a boost of confidence. For the first time ever, an autonomous flying taxi service is in service, in New Zealand. In a joint effort from Google CEO Larry Page, and local New Zealand operator Zephyr Airworks, the self-flying taxi can fly 62 miles unmanned and carry two passengers. The taxi is called “Cora,” and is powered fully by batteries.4
With a new Director of the National Economic Council confirmed and Trump’s tariffs signed, it is uncertain just how these changes will shape the economy. And while current economic data has seemed firm in the U.S., it is still important to keep an eye on economic indicators and prepare yourself for any ups and downs. That is because when you are in the second longest running bull market of all time, it may make sense to start looking for signs of the next bear.
So now the question to you, “Is your portfolio prepared for any potential bear market?”
It may be best to answer this question now when things are steady and prepare for any possible outcome. To help you answer this question, we are offering a free Portfolio Stress Test that may help analyze how your portfolio would perform during the next bear market.
That is just one of the many potential benefits of a Portfolio Stress Test. Learn more about what it may do for you by clicking on the link below:
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1 Source: Seeking Alpha
2 Source: Wikipedia, https://en.wikipedia.org/wiki/Larry_Kudlow
3 Source: CNN, https://www.cnn.com/2018/03/14/politics/larry-kudlow-white-house-economist/index.html
4 Source: Seeking Alpha