Investment Insights: Cohn clears out

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Aerial view of long rows of aluminum ingots beside a sunny harbor.Amid the wake of increased fervor surrounding tariffs, Trump’s Director of the National Economic Council, Gary Cohn, resigned late Tuesday. The news brings additional uncertainty to a financial market already digesting a myriad of other impacts surrounding a perceived reversal of globalism here in the United States.

Reports of the reasons for Cohn’s departure centered on the chief economic advisor’s direct opposition to the president’s plan to impose tariffs on imported goods such as aluminum and steel, and further restrict free trade for some sectors. Cohn’s disagreement was hardly the only voice, which also included prominent economists, investors, and world powers expounding the virtues of open trade. Although the Bank of the West Global Investment Management team has been reporting on isolationism as a potential risk for quite some time – in fact, going back to the campaign trail – its low probability had been predicated on the ability of advisors such as Cohn to deter the administration’s more nationalist ideology.

Cohn, who had been a long-term Wall Street fixture and was a former president at Goldman Sachs, was expected to be one of the more constant voices in the wings of the White House regarding the country’s economic well-being. Additionally, investors were comforted knowing that a top advisor like Cohn knew the intricacies of the financial markets, spoke the street’s language, and would be an ally for them in D.C. Much as could be expected, financial markets reacted negatively to the news of Cohn’s resignation and the seemingly imminent tariffs. Fears are centered on an expectation of potential retribution by other nations and a question of which additional raw materials or sectors could be affected.

As reported by the Bank of the West Economics team, the levies on aluminum and steel alone are largely insignificant for continued real growth. Steel and aluminum imports are marginal, combining to only 1.6% of total U.S. imports. Our Chief Economist Scott Anderson writes, the effects on consumer inflation “will be only a few hundredths of a percentage point increase.” As a market that was worried about the rapid increase of inflation and surging rates at the beginning of the month, this shouldn’t be enough to move the risk dial materially. However, if the tariff rhetoric continues and extends to agricultural products, markets could see a large risk-off event across all sectors and asset classes.

For now, markets are digesting the news and awaiting potentially more dramatic action from the U.S. government or more pointed responses from affected nations. The loss of Cohn combined with past turnover within the White House is concerning in that uncertainty breeds uncertainty. During the president’s 12 months in office, the current officials haven’t had to deal with a large financial crisis or even a bear market – so when the time comes, investors are already worried about the potential response. Trade war risks will increase in the coming months and will be the easiest thing to point toward for increased volatility in domestic and international equities. Other risks including inflation, the Federal Reserve raising rates too quickly, and the budget deficit are still at the forefront, but are just riding shotgun for now.

Bank of the West’s diversified portfolios are spread throughout the world and across countless equity sectors and industries, making for a muted affect when considered against individual equity investors who have large concentrated positions in corporations like U.S. Steel or Nippon Steel in Japan. Making a macro evaluation of the events which have transpired, we believe the rose has bloomed on the height of globalism. Expect more turmoil the further the trade agenda is pursued, but also remember that the trajectory for earnings and economic fundamentals is still pointing upward, making for a tough argument against keeping an overweight to equity assets.

Editor’s note: An earlier version of this blog post incorrectly characterized Gary Cohn’s former title at Goldman Sachs, but it’s corrected in the text above. We regret the error.

Chart showing various market returns as of 3/6/18

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