We think investors are overestimating the potential negative impact of a "trade war"

Investors still seem to be underestimating the revitalizing effects of the fiscal stimulus and regulatory easing while overestimating the potential negative impact of a “trade war.” This suggests to us an increase in real GDP, inflation, bond yields, earnings, and stock prices as the year progresses. The pace of stock price appreciation (the multiple), however is likely to slow as the real economy lures liquidity away from financial assets. We continue to have a bias of value over growth and small caps over large. Internationally, we still like Japan.

Last week began with positive news that the U.S. and Canada reached agreement on a NAFTA replacement; the tri-party agreement will now be submitted to each country’s legislature for approval.  News that Italy sought to significantly widen the country’s budget deficit targets, and commentary from various Federal Reserve Board members, overshadowed the trade agreement.  The Dow Jones Industrial Average reached a new record high on Tuesday before retreating; for the week, the DJIA fell 0.04%; the S&P 500® Index lost 0.98% followed by the Nasdaq (-3.21%) and the Russell 2000® Index (-3.80%)

The new Italian government initially set a three-year deficit target of 2.4% for the upcoming three-year period; the optimistic plan anticipated that social spending would spur growth.  The deficit plan unnerved both the financial markets and the European Commission; Italian bonds, and the Italian banks which hold most of the bonds, sold off.  The Italian Economy Minister subsequently pledged to reduce the deficit in future years yet skepticism remains.  In the U.S., Fed commentary highlighted the view that the economy is performing well, and that future rate increases will be necessary to moderate inflation.  Chairman Powell’s statement that the economy “is a long way from neutral at this point” was interpreted as a more hawkish sentiment.  The yield curve steepened as Treasuries sold off; the 10-year U.S. Note rose 18 basis points to close at 3.23%, a seven-year high, while the 30-year reached a four-year high.  Employment news on Friday supported the Fed commentary: the unemployment rate fell to 3.7%, a low not seen since December 1969; 2.8% annual wage inflation remains within the expected range.  Technology and small cap stocks bore the brunt of the selloff over worries that the economy might slow and higher interest rates would dampen expansion. 

Global trade issues remain top-of-mind; talks with Europe and Japan provide a sense of optimism for a likely agreement; the heightened rhetoric between the U.S. and China, though, suggest that no agreement is imminent.  China is taking steps to stimulate growth such as suspending environmental reform financial incentives to boost corporate spending.  Commentary during the upcoming earnings season will provide additional color as companies discuss the impact of tariffs on sales and revenues and their expectations entering 2019.

Investment and capex are key to extending the business cycle in the US.  Capex (Capital Expenditures) that boosts productivity enough to allow wages to rise without putting too much pressure on margins is required to extend the business cycle. We remain of the view that we are more mid-cycle than end of cycle and are monitoring the real fed funds rate, corporate profits and average hourly earnings to look through the noise and gauge the health of the economy and business cycle

This week Q3 earnings seasons kicks off, JPMorgan, Citibank and Wells Fargo report earnings and will comment on the potential impact of higher interest rates.  Across the economy, higher interest rates will benefit financially strong companies as weaker competitors are hampered by higher debt costs.  Inflation enables many companies to generate higher earnings by raising prices.  The current market fears are likely linked to the normalization of interest rates.  Investors may need some time to adapt; thus far, though, the economic data support continued growth with no signs of recession on the near-to-intermediate horizon.

Source: Strategas and Pacific Global Investment Management Company

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.


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Brian Amidei is Coachella Valley's only Barron's Magazine Top 1,000 Advisor in 2013 and 2014!

Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017 Five Star Wealth Managers!

Disclosures:

Awards and recognitions by unaffiliated rating services, companies, and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Fortem is engaged, or continues to be engaged, to provide investment advisory services; nor should they be construed as a current or past endorsement of Fortem or its representatives by any of its clients. Rankings published by magazines and others are generally based on information prepared and/or submitted by the recognized advisor. Awards may not be indicative of one client?s experience or of the Firm?s future performance.  Neither Fortem nor the recognized advisor has paid a fee for inclusion on a list, nor purchased any additional material from the award provider. The criteria for each award is listed below:

Barron's Disclosure:

The Barron's award is is based on the recognized adviser's assets under management, contribution to the firm's revenues and profits, and quality of practice.  Investment performance is not an explicit criteria.  Additional information about this award is available at http://online.barrons.com/report/top-financial-advisors. 

Five Star Professional Disclosure:

The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided.  Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf

Fortem Financial 2016. All rights reserved. 

Data Sources:  News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations.  Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates).  All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. 

Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice.  The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates.  Past performance is no guarantee of future results.  All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.  Forward looking statements are based on current expectations and assumptions, the economy, and future conditions.  As such, forward-looking statements are subject to inherent uncertainty, risks, and changes in circumstance that are difficult to predict.  Actual results may differ materially from the anticipated outcomes.  Carefully consider investment objectives, risk factors and charges and expenses before investing.  Fortem Financial is a registered investment adviser with the SEC.  Advisory services are offered through Fortem Financial.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks.  The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.  The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.  The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks.  The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide.  Market indices listed are unmanaged and are not available for direct investment.

New era for trade with Mexico and Canada, finally a fair deal for all

Just reaching an agreement was the first step. Now the US Trade Promotion Authority (TPA) process will kick in. By the end of 2018, we expect the International Trade Commission to issue a report for Congress detailing the economic impact of the renegotiated NAFTA agreement. The purpose of this report is to be informative for members of Congress before they vote. We have no idea how the report may score the benefits of enhanced intellectual property protection and the new financial services rules, but the auto changes are likely to be a drag on growth, all else being equal. In our view, the cost of automobiles will be increasing from this deal but partially offset by the new jobs created. This may not matter much if the other parts of the agreement lift growth more, but you can see the press having a field day with Trump if the agreement lowers growth in the aggregate.

Trade headlines heavily influenced the major indices last week.  The Dow Jones Industrial Average fell -1.9%, the Russell 2000® Index fell -0.92% and the S&P 500® Index lost -0.54%.  The Nasdaq rose 0.74%.  For the month of September, the Dow and S&P 500® rose 1.9% and 0.43%, respectively.  The Nasdaq fell -0.78% and Russell 2000® declined -2.54%.  Overall, favorable economic data and news about trade, Brexit and the OPEC meeting headlined a rather quiet month.  Oil prices rose this week as OPEC decided against production increases to compensate for the impending loss of Iranian oil when the November trade ban takes effect.  Analysts, are questioning OPEC’s capability to increase production, are increasingly speculating about the potential for oil prices to reach $100 per barrel.

Last weekend, China cancelled upcoming high level trade talks after the U.S. imposed its latest round of tariffs; on Monday, China published a white paper which attacked the "protectionist" and "trade bullyism" practices of the U.S. administration.  The U.S. signed a trade agreement with South Korea and agreed to begin negotiations with Japan on a new trade pact.  Facebook and Tesla sold off in Friday trading.  Facebook fell 2.59% after reporting a security breach potentially effecting 50 million users.  And, the two co-founders of Instagram, a significant revenue generator for Facebook, announced their upcoming resignations on Monday.  Yesterday, the SEC filed a civil fraud suit against Elon Musk for allegedly lying to investors when he claimed (on Twitter) that he had secured funding to take Tesla private; the suit seeks to ban Musk from corporate leadership.  This suit was settled over the weekend with the company and Musk each paying $20 Million dollar fine. As part of the deal, Musk had to resign as Chairman of Tesla. The stock closed 13.9% lower on Friday as investors weighed the potential fallout, but is up 14.72% today on the settlement news .  Also, the Federal Reserve raised interest rates 0.25% and reiterated its expectation for another increase in December.  The yield on the 10-year U.S. Treasury Note, which rose earlier in the week, fell after the widely-expected announcement.

In a few weeks the upcoming earnings season will add color to the generally favorable outlook of the global economies.  Some economists anticipate a reduction in global growth due to trade concerns and the impact of lower demand in emerging countries if oil prices continue to rise.  During September, stock prices for smaller companies in the Russell 2000® retreated from their August highs.  Earnings results may provide an opportunity for renewed growth.

Source: Strategas and Pacific Global Investment Management Company

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.


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Brian Amidei is Coachella Valley's only Barron's Magazine Top 1,000 Advisor in 2013 and 2014!

Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017 Five Star Wealth Managers!

Disclosures:

Awards and recognitions by unaffiliated rating services, companies, and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Fortem is engaged, or continues to be engaged, to provide investment advisory services; nor should they be construed as a current or past endorsement of Fortem or its representatives by any of its clients. Rankings published by magazines and others are generally based on information prepared and/or submitted by the recognized advisor. Awards may not be indicative of one client?s experience or of the Firm?s future performance.  Neither Fortem nor the recognized advisor has paid a fee for inclusion on a list, nor purchased any additional material from the award provider. The criteria for each award is listed below:

Barron's Disclosure:

The Barron's award is is based on the recognized adviser's assets under management, contribution to the firm's revenues and profits, and quality of practice.  Investment performance is not an explicit criteria.  Additional information about this award is available at http://online.barrons.com/report/top-financial-advisors. 

Five Star Professional Disclosure:

The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided.  Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf

Fortem Financial 2016. All rights reserved. 

Data Sources:  News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations.  Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates).  All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. 

Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice.  The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates.  Past performance is no guarantee of future results.  All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.  Forward looking statements are based on current expectations and assumptions, the economy, and future conditions.  As such, forward-looking statements are subject to inherent uncertainty, risks, and changes in circumstance that are difficult to predict.  Actual results may differ materially from the anticipated outcomes.  Carefully consider investment objectives, risk factors and charges and expenses before investing.  Fortem Financial is a registered investment adviser with the SEC.  Advisory services are offered through Fortem Financial.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks.  The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.  The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.  The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks.  The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide.  Market indices listed are unmanaged and are not available for direct investment.

The Fed raises rates again

As expected, the Federal Reserve raised rates by 25 basis points yesterday. And at this point, the outlook for the remainder 2018 looks largely determined, with both 75% of Fed officials and the markets pricing in one more rate hike in December to make it four for the year. What remains to be seen – and the focus for many with yesterday's release – is how policy will develop in 2019 and beyond.

The only substantive change in yesterday's statement was the removal of a sentence noting the stance of monetary as "accommodative" and supportive of both the labor market and the Fed's 2% inflation target. The doves will focus on this deletion as a sign the Fed thinks monetary policy is already neutral, limiting the outlook for hikes in the year ahead. We disagree. Chair Jerome Powell made a point in his press conference that the language removal doesn't change their outlook for continued gradual rate hikes (and that even including yesterday's hike the federal funds rate stands below the long run forecast level of all sixteen committee participants). The change is little more than an acknowledgement that both inflation and employment have reached or surpassed target levels, and further "support" isn't necessary.

Updates to the projection materials (the "dot plots") also reinforce the outlook for higher rates through 2019. As noted above, FOMC members believe that a fourth hike is appropriate before year-end, while the outlook for 2019 has a median forecast of three hikes (and the financial markets have odds on just two hikes next year). This is little changed from the June forecasts, despite upward revisions to GDP forecasts for both this year and next. Worth noting is that the Fed has raised GDP growth forecasts with each of the last four projection releases.

While we agree with the Fed's forecast of 3%+ real GDP growth in 2018, we also expect growth next year to be 3%+ as well, while the Fed is forecasting real growth of 2.5%. Paired with continued strength in employment and inflation at or above 2%, we continue to expect four 25 basis point rate hikes in 2019, just like we expect this year. And with nominal GDP growth - real growth plus inflation - above 4.5% at an annual rate over the past two years, monetary policy will still not be tight for years to come.

In short, the path towards higher rates remains on track at a steady pace. Thanks to policy changes ranging from tax cuts to regulatory relief and attractive depreciation schedules, the economy is humming along and the "data dependent" Fed has received overwhelming data to prove it.

Source:  Brian Wesbury, Chief Economist at First Trust

The only caveat to this outlook is that long-term rates have remained persistently low and inflation pressures have been more benign than some may have anticipated.  If longer-term rates do not move up with the Federal Reserve's scheduled rate hikes, we may see more members of the Federal Reserve Open Market Committee vote to hold on additional rate hikes next year.  The good news for the economy is that since the last rate hike, the 10-year Treasury moved above 3% (and seems to be holding there), lowering the odds of an inverted yield curve coming next year.

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