by Connor Darrell, Head of Investments
Global markets slid lower last week due in large part to ongoing global trade tensions.  Emerging markets stocks were hit hardest and are now down over 5% this year. On a rolling one-year basis however, they have still managed a return in excess of 10%.

Bond yields remained relatively stable, with the 10 Year Treasury still sitting at around 2.90%. The yield curve (which plots the yields of bonds of differing maturities along one line) continued its trend of flattening last week. The 10-2 Treasury Spread (measured as the difference in yields of the 10 Year and 2 Year Treasury Bond) now stands at just 0.33%, a 58% decline from just a year ago. Those in the business of trying to forecast market movements (a notoriously difficult, if not impossible proposition) typically watch the yield curve closely during the latter stages of an economic expansion, as an inversion of the curve has historically preceded a recession. An inversion of the curve occurs when the yield on longer term maturities drops below that of shorter term bonds.

The other major development in the US equity market last week was the removal of General Electric (GE) from the Dow Jones Industrial Average. GE was an original member of the oft quoted stock index but has fallen on hard times as its earnings and profitability have collapsed under the weight of its highly complex business model. GE has been replaced by Walgreens Boots Alliance, which contrary to its name is actually a retail pharmacy (of which you are likely familiar) and is not in the business of selling footwear. This was major news for markets in that GE has been a member of the DJIA for over 100 years. The fall from grace has been substantial for GE, which had the largest market capitalization of any company in the world as recently as 15 years ago.

Tariffs and Trade Wars Revisited
As a result of the Trump Administration’s hard stance on trade, it has been difficult to avoid discussing the potential implications of the policies that the US, China, and now the EU, Canada, and Mexico have been threatening each other with. The probability that rhetoric evolves into policy, and to what extent the policies under discussion change prior to implementation is extremely difficult to ascertain, and the market is having a difficult time making sense of everything as a result.  It is for this reason that we have not been able to point to one major market move while placing blame on trade tensions. Instead, we have experienced a number of smaller moves as the market reacted to the latest headlines. This is likely to continue until the market either has reason to focus on other news (strong Q2 GDP growth anyone?), or we get more clarity regarding what is a threat and what is likely to actually be implemented.

The only things we can say with confidence are the following:

• Tariffs are an inflationary force. Any time a tax is levied on a product, regardless of its nation of origin, the price of that product is likely to increase.  Rising prices are the definition of inflation.
• Tariffs will reduce global economic growth potential in the long run. Trade works because it creates a mutual benefit among the parties involved.  Goods and services are produced by those who can do so most efficiently.  Trade barriers create inefficiencies that lead to a sub-optimal allocation of resources in the global economy, which reduces growth in the long-term.

This is not intended to serve as a critique or endorsement of any political view. There are very real problems that need to be addressed in the way that countries do business with one another, and after all of the dust has settled, those of us with a stake in the success of the global economy may very well be better off. But our job as investors and asset allocators is to identify the key issues that can impact financial markets so that we may best position our portfolios to protect our hard-earned money. This often involves trying to gain an understanding of how economics and policy react with one another.