Author: Franklin J. Parker

by Franklin J. Parker, CFA

This week is a big week for markets. The Federal Reserve meets this week, we see data on employment and economic growth, and we are in the thick of earnings season. A lot to digest!

We are about a third of the way through earnings season. It appears companies will grow earnings by about 7%, which is right about average. Investors are listening to earnings calls for hints about coming quarters as the trade war and deteriorating economic data are both taking their toll on forecasts (more on this in this week’s chart of the week).

This past weekend, the Trump administration reached a deal with the European Union, settling on 15% tariffs on EU imports to the US. Steel and aluminium will be taxed at a 50% rate, however, and there remains some provisions to still be hammered out. The EU agreed to purchase $750 billion worth of energy products (oil, natural gas, and nuclear fuel) and invest $600 billion in US infrastructure and military equipment over the next three years. To put these figures into perspective:

• Total US oil & gas production totals around $480 billion per year. Assuming that most of the EU’s committed purchases are of oil & gas, this commitment represents about half of total US production per year — a substantial increase in demand for US producers.
• The US exports around $118 billion worth of military equipment every year. If we assume that around half of the EU’s committed $600 billion figure is slated for military equipment, that would represent an almost doubling of military exports over the coming three years.

There are several investment takeaways from this deal, and we will begin implementing those in our portfolios over the coming weeks, though many questions still remain (not the least of which: how can these numbers possibly work?).

Investors expect the Fed to hold rates steady at their meeting this week, though all ears will be tuned to hear any changes in the pace of cuts. At the moment, the market is split between a cut in September or a cut in October.

And, lastly, we are watching the employment very closely this week. So far, US employment has been getting steadily worse, with more people leaving the labor force than finding jobs, and several prominant job cuts coming up.

Overall, while the recent trade deals may be a boon for certain sectors, we still see higher prices to consumers at a time when consumers are strained. The economic data is still negative, but markets have continued to climb to new highs. In our view, this is a time to evaluate where and how you are taking risks.

Chart of the Week

This week’s chart demonstrates the impact of tariffs on global companies. By far, the most common action in the US has been to cut and withdraw earnings guidance, with many companies simply stating they expect to make less money.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

The US economy continues to demonstrate surprising resilience. All of last week’s data came in better than expected. Employment was stronger, with more job openings than expected, and the headline unemployment rate dropped to 4.1%. We also saw factory orders increase at a very strong pace.

There is, unfortunately, still bad news lurking inside the good. If we factor out government hiring, the private sector only added about 74,000 new jobs last month (not a strong number). The only reason the unemployment rate dropped was because more people left the workforce than left their job. There were also several layoffs announced this past week, most notably Microsoft, who will be laying-off about 7000 workers in coming months.

All eyes this week are on Wednesday’s trade deal deadline imposed by the Trump administration. Trump has signalled his willingness to push that deadline to August 1. In my view, the deals that have been done are damaging to US consumers and don’t seem to encourage foreign consumption of US-goods. Net-net, I see the deal with China, for example, as overall negative for economic growth (tariffs on Chinese goods are went from 10% to 50%, and higher for some goods — not to mention, the administration has not released the details of the deal). At a time when US consumers are already weakened, adding the price burden of tariffs might be enough to slow consumption and push the economy into a recession.

The “one big, beautiful bill” that was passed last week may offer some offset to those tariff woes, at least in the short term. There are some stimulus-oriented provisions that could help boost spending, and some provisions that may help markets — the $1000 for children born between 2025 and 2028, for example, could boost market inflows by about $3.6 billion per year (about 6% higher inflows than we currently have, on average).

Overall, I am in wait-and-see mode. The data is mixed, but has been generally negative over the past months. The dollar’s crash may also portend inflation and an overall slowdown (see our Chart of the Week). The tariff issues that sent markets reeling back in April have not been resolved though markets seem to have shrugged them off, pushing into all-time highs. Based on the data, I can see no justification for this, and our strategy has always been to follow the data, which we shall continue to do.

Chart of the Week

The US dollar’s crash has been an under-told story over this year. Between tariff shocks, the ballooning deficit from Trump’s “one big, beautiful bill,” and the administration’s ongoing war of words with Fed Chair Powell, the US dollar has been in freefall. We see in this week’s chart how much it has declined. Relative to the euro, for example, the dollar has lost almost 14% of its value this year, and it has lost 9% relative to UK sterling.

Some economists view a declining currency as a good thing — it generally makes your goods and services less expensive to overseas buyers, thus encouraging exports. The dollar has a unique status, globally, however. The dollar represents a significant share of global trade, so less demand for dollars may indicate slower trade overall. More importantly, it means that a dollar buys 14% less in Europe than it did before, or 6% less in Canada. This creates upward price pressure on goods and services in the US which may yet further slow US consumers.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

We got an influx of data in the last week, but unfortunately none of it was particularly good. Manufacturing remains in contraction, factory orders continue to contract, and — most surprisingly — the services sector entered a contraction, with ISM’s non-manufacturing PMI posting a decline for the first time since last June. The services reading may be a one-month blip (as it was last year), so we will watch closely for next month’s reading to see whether a trend is forming.

Job figures also posted last week. On the upside, the unemployment rate held steady at 4.2%, but that wasn’t because unemployed people are finding jobs, it was because some 625,000 people left the labor force. Employers are still reluctant to lay off workers, which is good, but it is beginning to feel that the larbor market is on a knife’s edge.

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This week we see all-important inflation data, which will set the stage for the Fed meeting coming next week. Markets do not expect the Fed to cut rates, but investors will be listenting intently to Powell’s press conference for signs of what the Fed is thinking the path of rates may be through the end of the year — especially as economic data affected by tariffs has begun to post.

Overall, I am re-emphasizing my cautious view. I realize that this downward economic trend has been in slow-motion. Admittedly, I feel a bit like a Chicken Little. But, I am committed to reading the data for what it says, and while markets have certainly bounced back from their low, the economic data continues to worsen. At some point, prices catch up to the data. Therefore, in my view, downside risk looms larger than upside risk in our current environment. As the data changes, so will my view.

Chart of the Week

The Institute for Supply Management produces two indexes: their manufacturing index and their non-manufacturing index (which basically covers the services sector). For both of these figures, readings below 50 indicate fewer orders expected, while readings above 50 indicate growing orders. The manufacturing figure is somewhat volatile, and because manufacturing is only about 25% of the US economy, it is not uncommon to see a contraciton there without a larger economic contraction. Services, however, represent some 70% of the US economy. Typically, when services begin to meaningfully contract, a recession is not far behind.

Last week’s contraction in services, if part of a larger trend, is concerning becuase both services and manufacturing would be in contraction. That is, effectively, the entirety of the US economy. Therefore, next month’s figures will be very important to keep an eye on.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

A federal trade court ruled last week that the Trump administration overstepped its authority when it imposed sweeping tariffs. Almost immediately, upon appeal from the White House, a federal appeals court then put a hold on that lower court order while the administration appeals the decision. Tariff policy then, remains unchanged. Well, unchanged except for the new 50% tariff on steel scheduled to take effect on June 4, which jolted markets and trade negotiations over the weekend. The EU and UK both expressed dissapointment at this latest salvo (the UK especially, who just finished negotiating with the administration and who exports over $400 million worth of steel to the US).

Unsurprisingly, markets have been whipsawed by the on-again/off-again policy. Over the weekend, Beijing and Washington traded barbs — each accusing the other of violating their trade truce, leaving investors wondering if a trade deal can actually be reached before Trump’s 90-day extension runs out.

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In my view, US trade partners have little incentive to negotiate hurriedly with Washington. For one, last week’s court ruling opens the option of wait-and-see; the tariffs may go away with no negotiations needed. Second, the newly-announced steel tariffs undercuts the trade deal the UK just struck with the US; if the administration reneges on a deal just signed, why bother signing a deal at all?

We see some important data this week with job openings, the unemployment rate, and consumer credit. PMI figures will also be watched closely for insights into the economy. While manufacturing has been in contraction for years now, the services sector has only recently fallen from strong expansion to barely breakeven. A fall into contraction for services may be a negative signal.

Markets have bounced hard off of their bottom, however I believe that to be overdone. The trade war has only gotten more complicated with higher risks, yet US stocks are trading as though the trade war had never begun! That said, we may see a return to pre-“liberation day” tariff policy given last week’s court ruling. Even so, much damage has been done in the ensuing time period, and ignoring that seems foolish to me. Earnings have been good yet consumers have come under more strain, leading me to question how long strong earnings can continue. Not to mention, all of the classic recessionary signals are present: an inverted yield curve, unemployment moving higher, PMIs in contraction, and so on. Exactly how this environment should be managed is dependent on numerous factors that are specific to you, but my overall view is that downside risk currently outweighs upside risk.

Chart of the Week

This week’s chart comes to us courtesy of Reuters and it shows how companies are dealing with the added costs of tariff duties. Of interest to me is that only about 12% of companies are currently making supply-chain shifts (which is the administration’s stated goal) — 88% of companies are doing something else, such as raising prices or cutting their profits by eating the extra costs.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

A weekend call between Trump and EU Commission President von der Leyen has markets rallying after the Trump administration agreed to delay tariffs on the EU until July 9 — potentially giving time for the US and EU to work out the details of a trade deal. Of course, the administration is simultaneously negotiating with other large trade partners, such as China, and the on-again/off-again trade policy has left businesses wondering where long-term trade policy will end up.

Earnings season is largely done. Overall, it has been a good quarter, with companies increasing profits by around 13% over this time last year. While most companies have kept their earnings outlook for the year, several companies have said they would have otherwised upped their expected earnings were it not for tariffs. Some major retailers have also lowered their earnings guidance for the year due to tariff uncertainty.

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Lastly, it is worth noting that the Federal Reserve was originally expected to cut rates at their June meeting. Markets now expect that they will wait until September. While not a serious issue, this adjustment to a “higher for longer” stance is weighing somewhat on investor sentiment, especially in big tech companies.

Overall, I remain cautious. The recent market rally has brought large-cap prices back to where they were before tariff policies were announced. This suggests that investors suspect tariff policy resolving to a state better than pre-tariff policy. While that may be the case, my thinking is that damage has been done to the economic picture, at least in the short run. Furthermore, it is by no means a given that negotiations with the EU (the US’s largest trade partner) and China (the US’s second-largest trade partner) will be resolved by July. Renegotiating trade has typically taken longer than a month, and I suspect there are some downside surprises lurking this summer.

Chart of the Week

Consumer sentiment has been a topic of conversation lately. Despite staging a minor recovery after falling precipitously through the pandemic, consumer sentiment is now at levels not seen since the Great Financial Crisis of 2008 – 2010 and the stagflationary period of the late 1970s / early 1980s. Of course, whether low sentiment will yield actual consumer strain remains to be seen.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

Earnings season is coming to a close. It looks like companies have grown earnings by about 13% over this time last year, which is very good growth. Tariffs have created quite a lot of uncertainty on earnings calls, however, with some companies suspending their earnings guidance for the year.

Over the weekend, the Trump administration announced “substantial progress” in their trade talks with China. As a result, the administration has announced large, but temporary, cuts to tarrifs on Chinese imports to the United States while negotiations continue. Markets have rallied strongly on the news. My view is that this rally is a bit premature.

First, tariffs on Chinese imports were cut from 134% to about 40%, and 40% is still a substantial tariff (about 4x higher than previously). One analysis suggests that a 40% tariff could still push imports from China down by a third. Second, there have been no real details nor concessions from China in the currently-announced deal. It appears that China just more-or-less called Trump’s bluff, and my suspicion is that Trump won’t like that. Whether this reprieve holds in longer-term negotiations remains to be seen.

Lastly, lots of damage has already been done. It takes 50 to 60 days for container ships to reach the US from China, so we are just now seeing the results of the first round of tariffs from back in April. Container volume has been cut by 25% to 30% by major carriers, and much of that affect is likely not going to be fully seen until July. In my own economic model, a slowdown in shipping is typically strong evidence of slowing economic demand, so this level of contraction in the sector is evidence to me that a recession is likely forming (or has already formed). The point is, even if all trade policy were to revert to pre-April status, we would still have stubstantial fallout from current policy that will take some time to work itself through the economy.

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And all of this has said nothing about the Fed meeting last week! As expected, the Fed held interest rates steady. Of more interest is that investors have now pushed a rate cut to almost September (only a 60% chance of a cut in July), and generally expect rates to be higher for longer. Again, this is the stagflation trade — slower economic growth with inflation running hot.

In summary: While the recent market rally has been strong, I am not convinced it will hold. The Fed’s hands are somewhat tied by inflation, and the damage of the trade war is only just now working its way through the economy. The economic data is still poor, though corporate earnings are a bright spot. I am still recommending caution in this environment.

Chart of the Week

This week’s chart sums up our view of the status of the economy. After dipping into a recessionary market environment, the recent market rally has pushed our indicator back into the pre-recession phase. As mentioned above, my view is that this is likely temporary as markets do not take a straight line down to their bottom.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

The big news last week was the US GDP report — it appears the US economy shrank by 0.3% in the first three months of the year. There were some wonky effects, such as a huge increase in imports as businesses and individuals rushed to get ahead of tariffs (a negative) combined with a large buildup in inventories (a positive). What concerned me most about the data, however, was the contraction in consumer spending. It has been the consumer who has kept the economy afloat, and signs of struggle there may not bode well for the larger economy. More about this in this week’s Chart of the Week (see below).

Last week we also saw unemployment figures for April — a few more jobs than expected were created, however the unemployment rate remained steady, more due to people leaving the labor force rather than people finding a job. Overall the employment situation in the US appears to be deteriorating, though it is certainly not in freefall. We need to keep a close eye here.

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We are now about three-quarters of the way through earnings season, and it is going well. Overall, it appears companies will report earnings growth of 12.5%, which is above average. That said, many analysts and companies are reducing their earnings expectations for the year in response to the Trump administration’s tariff policy. Corporate earnings have been the bright spot in this economy and if they can maintain good earnings growth, there is likely a floor to any market selloff.

I continue to urge caution in this environment. Despite corporate earnings, the early signs of recession are flashing. Investors have seen a reprive with the recent rally, but we still are still below some key levels in markets. For investors who are approaching a goal, downside risks currently loom larger than upside potential, at least in my view.

Chart of the Week

This week’s chart demonstrates how much consumers and businesses have pushed to get ahead of tariffs. Inventories increased as businesses imported and stocked what they could (blue in the chart below), while overall imports pushed a significant drag on the economy. To be fair, the GDP calculation assumes trade imbalance as a net negative to GDP growth, but the truth is much more complicated than that. I would expect these effects to go away in the next quarter — inventories are likely to shrink (creating a drag), government expendures appear to be shrinking (creating a drag), and net trade is likely to have litte to no affect. That leaves the size of consumer spending and private investment to make up the difference. The big question is: will they?

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

A little over one-third of US companies have reported earnings. While earnings have been overall positive — companies are reporting about 10% profit growth over this time last year — there has been a significant rise in both uncertainty and cost cutting. Citing tariffs and overall policy uncertainty, CEOs are cutting travel, slowing hiring, and delaying major investments (such as factories and warehousing).

This week is a big data week with the unemployment rate, manufacturing and non-manufacturing PMIs, job openings, first quarter GDP, and personal consumption expenditures (the Fed’s preferred measure of inflation). All of these have a direct bearing on the Federal Reserve’s reaction to an economic slowdown, and we have have seen investors dramatically price and re-price the Fed’s interest rate policy over the past several weeks. At the moment, markets expect the Fed to hold rates steady until their June meeting, at which point they expect the beginning of steady interest rate cuts through the end of next year. My take is that the Fed will not be able to cut as much nor as fast as markets are hoping, largely due to tariff-inflicted price increases (leading to stagflation).

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The active reduction in costs and delaying of significant investment by companies are tell-tale signs of a recession. Policy uncertainty is playing a significant role here. Without a clear understanding of the future policy landscape (will there be tariffs or not? can we hire non-US workers or not? etc), business owners/leaders are much more likely to just hunker down until policy becomes steadier and clearer. At any rate, despite decent earnings growth, I am reiterating my view that our current environment is recessionary and investors should prepare accordingly.

Chart of the Week

Durable goods orders posted a big upside surprise last week. Investors expected 2% growth and instead saw 9.2% growth last month. In another environment this might be good news, but this was almost certainly an effort by consumers and businesses to get ahead of the tariffs, so we would expect to see a signficant decrease in orders in coming months.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

We are in the heat of earnings season, with major banks having reported last week. Overall, financials have performed very well, delivering strong earnings. This week we see earnings from 122 of the 500 companies in the S&P 500. Tariffs are, of course, a central conversation in these calls with investors. We still expect to see earnings growth of 10% or so.

The US dollar has taken it on the chin the past couple of weeks. About 40% of revenue earned by US companies is earned overseas — meaning a weakening dollar is actually a good thing (ironically) for these companies reporting earnings in US dollars. That said, there is substanial worry about the ongoing viability of these earnings if the trade war is not resolved sooner rather than later.

Speaking of the dollar, there is a little-discussed consequence of reforming the US as a non-import-based economy. When the US imports goods, we receive goods and the country that exported those goods receives dollars. So, we get stuff from Vietnam and Germany, for example, and now Vietnam and Germany have dollars. Now, when Vietnam and Germany wish to trade, they can easily trade in dollars because they both have them. This helps make the US dollar the dominant currency in the world (the “global reserve currency”). However, if the US restricts imports, dollars become more scarce on the global stage and that weakens its position as the global reserve currency. This has not been something that has been discussed, but it is a long-term consequence of curtailing US imports.

Trump has now taken aim at Federal Reserve chairman Jerome Powell, and investors have reacted negatively to that. During the campaign, Trump suggested the central bank should be under control of the executive branch, an idea that, if enacted, would be extremely damanging to monetary stability. Countries where central banks are under direct control of political leaders tend to see higher inflation and poorer economic outcomes. At any rate, investors are now wondering whether that was campaign rhetoric or a serious policy proposal.

Chart of the Week

After a period of strengthening relative to other major currencies, the US dollar has given back its gains and has been largely in freefall since the tariff announcement. This week’s chart looks at the Euro/Dollar exchange rate over time. After touching $1 for €1, $1 now buys only €0.87. This can make US goods more attractive to overseas buyers, which might be an economic spur in the short run. However, this dollar slide is widely believed to be a consequence of the flight of capital from the US, which is a larger problem. If the US ceases to be a home for international investment, that means there is less capital to build everything from infrastructure to factories — a longer-term economic negative. As usual, why something is happening is more important than the event itself.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

by Franklin J. Parker, CFA

This week’s big news is still Trump’s tariff regime — the ongoing questions of who/what is included and who/what is excluded. The Trump administration announced a 90-day pause last week on tariffs to all countries except China, with whom the US tariff rate now stands around 130%. There are some limited exceptions (including smartphones and some electronics). China, of course, responded with sweeping tariffs on US-made goods.

If global tariffs do end up being rolled back, that will be an overall good for the US economy. On our current course (and, admittedly, that course changes almost daily), with our current tariff rate on China I see the US slipping into a recession, but not as bad a one as I feared last week.

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In other news, earnings season as begun. Investors will be digesting reports over the next couple of weeks. In particular, there will be many quesitons about the new trade regime the Trump administration is pursuing. Earnings are expected to grow about 10% over this time last year (which is good growth — a lone bright spot among the bad economic data), but outlooks will be scrutinized closely. If investors are unconvinced this growth can continue, I expect to see markets deteriorate further (though less suddenly than last week).

Lastly, there is the economic data to consider. On the upside, inflation posted slightly lower than expected. If that holds, we may see a Fed more able to deal with a downturn. This week, we will see retail sales (an important figure!) and industrial production.

Overall, I am reinforcing my view that a recession is likely this year. It probably has not already begun as earnings contractions are a hallmark of recessionary environments. That said, markets tend to anticipate recessions by 3 to 6 months. As I mentioned last week, now is the time to talk to a financial advisor about preparing your portfolio for a recession.

Chart of the Week

This week’s chart (from Fathom Consulting) demonstrates the hand-wringing over the Trump Administration’s new tariff regime. As the chart shows, the effective tariff rate is moving from just under 5% to over 30% — a significant increase. Tariffs increase the price of goods. Some of that increase is absorbed by the importing business (lowering profits, bad for investors), and some of it is passed along to consumers (bad for consumer spending, which is about 75% of the US economy). While others can debate the merits of the tradeoffs involved, investors need to be aware of the change in the bottom line of businesses and the economy!

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.