The Markets – U.S. equities notched a modest gain for the month of January with the S&P 500 Index gaining +1.53%, the Dow gaining 0.53% while the NASDAQ gained +4.52%.
Washington – A big concern among analysts following President Donald Trump’s inauguration speech was the sense that he intended to follow through on a lot of his agenda, including trade restrictions. That seems to be the issue that most concerns economists. Many feel that trade restrictions would negate the more positive agenda items like tax and regulatory reform and increases in infrastructure spending.
The Fed – As January closed, The Federal Open Market Committee (FOMC) is in the midst of their first 3 series of meetings. The Fed is not expected to raise rates just yet. The market seems to be predicting the next raise will not occur until June. Of course, it is not big news that the Fed has flipped from “data dependent” to “Trump dependent”. Uncertainty under the new administration is becoming the new normal and we will have to watch the Fed to glean how they characterize change in the minutes recorded during this week’s meetings.
Headlines – I suspect that in the coming months folks will compare Trump’s trade policies with things such as the Smoot Hartley act. You can check out Robert Mundell’s 1999 Nobel Lecture, “A Reconsideration of the Twentieth Century.” It’s one of the better discussions of the Great Depression and its causes.
A deeper dive into what we may expect in the coming months:
It doesn’t take a whole lot of training in trade theory to know that unskilled or expensive labor will suffer in a country that opens up trade to countries with a big surplus of unskilled labor or less expensive labor (like Mexico and China). Moving forward, the U.S. must increase labor skills and mobility particularly where technology is involved. That means spending more on education and job retraining programs.
We are hearing Trump push to restrict trade from other countries. One way to protect workers from the negative impacts of foreign competition is to keep foreign goods out, or to practice protectionism. However, this lessoning of competition tends to result in higher priced goods in the protected countries, and it leads to less efficient production by reducing the gains to specialization. It’s for these reasons that economists tend to oppose trade restrictions.
While Trump’s trade policies are important, we must focus on our business and how we manage it. We cannot get caught up in the politics of the day, or we risk losing clarity on what does and does not matter. Even famed management theorist Peter Drucker talked about how a successful businessman can be “wrong about everything else in the future economy or society, but that does not matter as long as they are approximately right in respect to their own business focus.”
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