Economists tell us that there are a few things that can derail a strong economy. The government can raise taxes. The central bank (i.e. Federal Reserve) can raise interest rates. Prices can jump (i.e. inflation). War can break out. <\/p>\n
The U.S. economy has been performing very well for the past several quarters. Inflation is low. Employment is very strong. Businesses are profitable. Wages are growing, albeit at a modest pace. The stock market has entered the 10th year of a bull market. It is a \u201cGoldilocks\u201d economy. <\/p>\n
Unfortunately, the current administration\u2019s policies may end up disturbing the equilibrium. Last week the stock market slid nearly 6%. The Dow Jones Industrial Average fell by 1,400 points. Technology stocks and financial stocks lead the way down.<\/p>\n
What happened? The Federal Reserve raised short-term interest rates by one-quarter of one percent. However, this was anticipated and essentially already \u201cpriced into the stock market\u201d. Facebook\u2019s stock was punished, because of its failure to protect its users\u2019 personal data. The giant social media company pulled down much of the tech sector with it. But this storm is likely to pass.<\/p>\n
The bigger problems are related to the actions taken by the current administration. The first day he was in office, President Trump withdrew from the Trans-Pacific Partnership. Soon thereafter he threatened to pull out of the North American Free Trade Agreement (or NAFTA), unless Canada and Mexico both make significant trading concessions to the US. Those negotiations continue with no indication of meaningful progress. A few weeks ago, the administration levied tariffs on steel and aluminum imports from many of our trading partners. Then, last week, the administration announced $60 billion of tariffs on Chinese goods. China quickly responded by imposing tariffs on 128 American products valued at $3 billion. So, we have the ingredients for what could quickly escalate into a global trade war.<\/p>\n
In addition, the administration signed into law last December the Tax Cuts and Jobs Act, which is expected to add $1.5 trillion to the national debt. The nation\u2019s debt is currently $21 trillion. While the reduction in taxes may stimulate the economy, it is not at all clear that the economy needs additional stimulus, and adding to the debt is not good for the economy, nor is it good for the stock market.<\/p>\n
The administration has proposed an infrastructure plan for spending on roads, bridges, utilities and buildings which would cost $1.5 trillion. It is not clear from where the money to pay for it will come. It has been presented as a public-private partnership program. Should it be fully implemented, it too would likely increase the nation\u2019s debt. On Friday, the President signed a spending bill with $21 billion for infrastructure projects. <\/p>\n
So, the administration\u2019s trade, tax and spending policies are a threat to the stock market. Time will tell how these policies unfold and the actual impact they have on the economy and on investors.<\/p>\n