Interest Rates, Tariffs, Mid-Term Elections & GE

For the past several years, part of our forecast has been a view that interest rates would begin to move higher. It is only fair to point out that until this year, interest rates, as measured by the U.S. Treasury 10-year Note, have been relatively steady and not demonstrated any kind of desire to move higher. However, this year we have experienced U.S. economic growth that should exceed three percent for the year, a first in nearly a decade, higher energy costs, increased wages, and full employment. Interest rates have moved up to the target range we projected at the beginning of the year and we believe they will hold on to these levels and gradually move higher over the course of the next year. In anticipation of higher rates, we have shifted our bond positions to a laddered short-term duration of U.S. Treasury Notes as we work through the process of interest rates find their equilibrium.

When President Trump first suggested that he would impose tariffs on other countries, he stated his belief that other countries would quickly acquiesce to his demands and there would be no damage to the U.S. As we get further embroiled in a trade war with China, it is becoming increasingly clear that trade wars, like shooting wars, can be very painful and often have collateral damage associated with them. The tariffs announced and implemented thus far have served to raise prices on the products they are associated with; i.e. Steel and have introduced uncertainty in pricing by all who are affected by the tariffed products. Uncertainty is not a characteristic that is friendly to stock markets and is part of the cause for the downward path the stock market took in October. Prolonged tariffs can also be an additional factor in both slowing down an economy and causing interest rates to move higher. Hence, we are keeping a sharp eye on the trade talks in the hope that both sides can find a solution that will remove both tariffs and uncertainties associated with the tariffs.

Mid-term elections have historically favored the political party that is not in the majority position of Congress. You have all read the prognostication that Democrats will most likely win enough seats in the Congress to become the majority party. The Senate looks like it will most likely stay in the Republican’s hands; though not by a large margin. Politics in the U.S. makes for good news commentary and is certainly of great importance to each of us; but, tends to be less impactful to the economy. We do not anticipate the election to have a significant impact on the economy; however, it will remove uncertainty and as mentioned earlier, uncertainty is not stock market friendly.

GE presented their fourth quarter earnings this past week. The quarterly dividend was slashed to just one penny per share; down from 12 cents per quarterly dividend. The power segment of GE’s business continues to have trouble finding traction in a very difficult environment and GE revealed that the U.S. Justice department was also involved in probing practices in the power business. GE’s stock price moved down with the bad news to levels not seen since the 2008-time frame. Perhaps we are too stubborn; but we are going to continue to hold on to our position, we will probably add our final third round of purchasing the stock at these levels and then look to sell the initial investment at a loss and use the realized loss to offset gains taken in portfolios throughout the year. We will likely need the full five-year time frame to see the benefits of our purchase in GE; but we are inclined to hold on to our investment and let that time work in our favor.

We hope you have a wonderful Thanksgiving – we are most grateful for the opportunity to work with you!