"This game don't seem like so much fun ..." — from "Ordinary Pain," as performed by Stevie Wonder
Trade wars, inverted yield curves, Brexit, and other political headaches are conspiring to create a global downturn and thwart growth in a fragile American economy. What we are rediscovering in painful fashion is that global markets indeed remain interconnected, and bad news for the economies of other countries can create undesired consequences for our own. While domestic economic trends are actually somewhat positive, let's consider each of the following headwinds:
• Trade Wars: There are no winners here. The best result that can be achieved is that the country that ultimately prevails loses less than others in the process. Participating in such a war basically commits one’s citizens to "outsuffering" the citizens of another country. American farmers and consumers and Chinese manufacturers and exporters are both suffering simultaneously. Which country is willing to outsuffer the other remains to be seen. China is playing the "long game" in this regard, and the appetite in America for an extended downturn due to a trade war may not be so strong. Investors who see their portfolios damaged by tariff policies may also create some backlash.
There are casualties inflicted on other peripherally involved countries. Germany's growth has stalled, at least partially due to the trade war between the U.S. and China. Thus, a trade war started by one country can eventually impact the entire global economy, which of course can in turn impact the country which initiated it.
• The Inverted Yield Curve: Recessions often follow yield curve inversions. An inverted curve means that the yield on a longer-dated Treasury bond is less than the yield on a shorter-dated one. That's unusual. Inverted yield curves don't cause future recessions but are, instead, often an early symptom of economic slowdowns. The yield curve often flattens and then inverts when market participants as a whole downgrade their expectations for the economy.
That said, markets often peak at 18 to 24 months after an inverted yield curve, so our bull market may yet have some runway.
• Brexit: This is the drawn-out European economic headwind that will not go away. British voters decreed that the UK would leave the European Union three years ago, and the country is still attempting to negotiate the exit. A "hard" Brexit creates a firm separation from all aspects of the EU. A "soft" Brexit allows for Britain to maintain most of its current EU membership benefits and addresses immigration policy as well. Keep in mind the EU as a whole is the second largest economy in the world and the UK is its third largest member. The global economy will be affected by a hard Brexit.
What roils markets is uncertainty, and there is plenty of that on the table, especially with tariff issues and Brexit. American businesses want to know the clearly defined "rules of the road" before they commit to new hiring and expansion. Certainty is difficult to come by lately.
Margaret R. McDowell, ChFC, AIF, author of the syndicated economic column "Arbor Outlook," is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.