Signal to Noise! Part Deux

Do not allow trade-talk noise to distract from the rates and inflation signals.

Two days after President Donald Trump’s inauguration I wrote about sorting the signal from the noise—the importance of taking a long-term perspective, being mindful of historical context, focusing on the real facts and sticking to them in your decision-making.

“Of all the objectives in the new administration’s agenda,” I wrote at the time, “none is likely to have more impact on markets and the valuation of individual stocks and bonds than reforming the tax code.”

While the noise level was high last year, the administration’s priorities—cutting regulation and business taxes—have been settled Republican policy objectives since at least the Reagan era. This year’s priorities—cutting immigration and intervening on trade—are not mainstream Republican at all. They cut across party lines, cause controversy domestically as well as internationally, and make the historical playbook irrelevant. Throw it out.

Get Used to Trade Being Front-Page News

Trade is far more complex than tax, from a policy standpoint, and certainly less well understood. The markets are further challenged by an absence of recent relevant experience to draw upon. In my 36 years in the markets, trade has rarely captured the headlines for long. The Plaza Accord in 1985, the creation of the World Trade Organization in 1995 and China’s admission into the WTO in 2001 are the few times that stick in my memory. It’s only thanks to the recent noise that we now recall the Bush administration’s short-lived steel tariffs in 2002, otherwise forgotten. Still, everyone knows the big lesson. In the spirit of the times, I’ve suggested to my family that we rename our Labradors Smoot and Hawley, after the U.S. Senator and Representative who sponsored the ruinous Tariff Act of 1930. It’s not going to happen.

When Joe Amato tackled the subject last week, he pointed out that the tough talk on trade would likely remain, uncharacteristically, on the front pages for at least the rest of 2018. Does this mean it will be the primary driver of market outcomes?

In the short term, this seems unlikely. We are talking about $50 billion to $60 billion worth of goods traded between two countries. That amounts to about a tenth of the value that these two countries trade each year, and a drop in the oceans of U.S. GDP, at $19 trillion, or world trade in manufactured goods, at $16 trillion. One would like to believe that the lessons of the 1930s mean that negotiations will prevail before this escalates enough to hurt the confidence of business people making hiring and investment decisions. In that case, U.S. tax reform is a much bigger deal for them than tariffs on pork and steel.

Signals Behind the Noise

It is all too easy to start screening the true signals out, however, precisely because they are so important, or because we think we already understand them. My suggestion is to keep reminding yourself that the Fed is already tightening and the ECB is likely to follow before the year is over—and just how monumental those facts are, after years of zero-interest-rate policy.

Can risks to trade generate enough uncertainty to slow policy tightening? FOMC members suggest they can, but they still think there are much stronger forces affecting inflation expectations, such as the coming fiscal stimulus and rising wages.

Are the market’s short-term perturbations in response to trade rhetoric overdone, then? At this point it is probably too early to say. The market’s view of this administration’s approach to trade negotiations is best summed up by Topper Harley, hero of the cult comedy classic Hot Shots! movies: “I’m not saying I don’t trust you, and I’m not saying I do. But I don’t.”

Trust will have to develop over time. It is not around the corner. In the meantime, get used to a lot of noise. And try to keep focused on the more important signals: those coming from the Fed and the ECB.


Brad Tank is a Managing Director, Chief Investment Officer, and Global Head of Fixed Income at Neuberger Berman. He is a member of Neuberger Berman's Operating, Investment Risk and Asset Allocation Committees. To learn more, see Mr. Tank’s bio or visit www.nb.com.

In Case You Missed It

  • ISM Manufacturing Index:  -1.5 to 59.3 in March
  • ISM Non-Manufacturing Index:  -0.7 to 58.8 in March
  • U.S. Durable Goods Orders:  +3.0% in February (excluding transportation, durable goods orders increased 1.0%)
  • Euro Zone Consumer Price Index:  +1.4% in March year-over-year
  • Euro Zone Purchasing Managers’ Index:  -0.1 to 55.2 in March
  • U.S. Employment Report:  Nonfarm payrolls increased 103,000 and the unemployment rate was unchanged, at 4.1%, in March

What to Watch For

  • Tuesday, 4/10:
    • U.S. Producer Price Index
  • Wednesday, 4/11:
    • U.S. Consumer Price Index
    • FOMC Minutes

– Andrew White, Investment Strategy Group

Statistics on the Current State of the Market – as of April 6, 2018

Market Index WTD MTD YTD
Equity      
S&P 500 Index -1.4% -1.4% -2.1%
Russell 1000 Index -1.4% -1.4% -2.0%
Russell 1000 Growth Index -1.5% -1.5% -0.1%
Russell 1000 Value Index -1.2% -1.2% -4.0%
Russell 2000 Index -1.0% -1.0% -1.1%
MSCI World Index -0.6% -0.6% -1.8%
MSCI EAFE Index 0.5% 0.5% -0.9%
MSCI Emerging Markets Index -0.7% -0.7% 0.7%
STOXX Europe 600 0.9% 0.9% -1.0%
FTSE 100 Index 1.9% 1.9% -5.4%
TOPIX 0.2% 0.2% -4.5%
CSI 300 Index -1.1% -1.1% -4.3%
Fixed Income & Currency      
Citigroup 2-Year Treasury Index 0.0% 0.0% -0.1%
Citigroup 10-Year Treasury Index -0.2% -0.2% -2.6%
Bloomberg Barclays Municipal Bond Index 0.0% 0.0% -1.1%
Bloomberg Barclays US Aggregate Bond Index -0.1% -0.1% -1.5%
Bloomberg Barclays Global Aggregate Index -0.2% -0.2% 1.1%
S&P/LSTA U.S. Leveraged Loan 100 Index 0.0% 0.0% 1.4%
ICE BofA Merrill Lynch U.S. High Yield Index 0.3% 0.3% -0.6%
ICE BofA Merrill Lynch Global High Yield Index 0.3% 0.3% 0.0%
JP Morgan EMBI Global Diversified Index 0.4% 0.4% -1.3%
JP Morgan GBI-EM Global Diversified Index -0.6% -0.6% 3.8%
U.S. Dollar per British Pounds 0.4% 0.4% 4.1%
U.S. Dollar per Euro -0.3% -0.3% 2.1%
U.S. Dollar per Japanese Yen -0.7% -0.7% 5.2%
Real & Alternative Assets      
Alerian MLP Index -0.1% -0.1% -11.2%
FTSE EPRA/NAREIT North America Index -0.2% -0.2% -7.6%
FTSE EPRA/NAREIT Global Index 0.0% 0.0% -3.3%
Bloomberg Commodity Index -0.6% -0.6% -1.0%
Gold (NYM $/ozt) Continuous Future 0.7% 0.7% 2.0%
Crude Oil (NYM $/bbl) Continuous Future -4.4% -4.4% 2.7%

Source: FactSet, Neuberger Berman.

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