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Index updated June 1, 2019


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The Blanchard Economic Report

Trade War Fallout Pummels Stock Market

Fallout from the escalating U.S-China trade war pummeled the stock market in May.

Stocks sold off around the globe as signs of slowing global growth appeared, and trade tensions climbed to greater heights between the world’s two largest economies: the United States and China.

  • Gold largely traded sideways during the month of May trading recently around $1,282 an ounce, largely unchanged from the end of April.

Recent strength in the U.S. dollar index kept a lid on the gold market. But, that is forecast to change soon. If the stock market pullback deepens and the impact from the trade war becomes more meaningful, analysts expect gold to begin a new rally phase in the second half of 2019.

Stock Market Sinks in May

The bull may be starting to unravel.

Trade war fears and concerns the global economy is at risk for a major slowdown triggered a fast exit from stocks in May.

The Nasdaq Composite Index fell 7.6% from its record high on May 3. Meanwhile, the S&P 500 Index is testing important 200-day moving average support. That level is considered the key line in the sand for the long-term trend and a decline below that level could unleash a more significant sell-off.

Trade War Escalates

In early May, the U.S. government followed through on its threat to increase tariffs from 10% to 25% on $200 billion worth of Chinese imports. “It affects more than 5,000 goods, including industrial chemicals, electronic circuit boards and a range of consumer products. Affected products include a variety of furniture, clothing, electronics, handbags, luggage, hardware, bicycles and bicycle helmets, shampoo, perfume, dishes, bed sheets, meat and cereal,” according to USA Today.

Economists are broadly warning that the jump to 25% will be a tax that is passed along to American consumers and will put upward pressure on inflation. Walmart and Macy’s warned that U.S. shoppers will almost certainly soon pay higher prices on everyday items.

The average family of four will pay $767 a year more and the U.S. economy will lose 934,000 jobs from the latest battle in the trade war, according to a study by the Trade Partnership.

First-quarter GDP growth is pegged at 3.1% annualized, just below the initial 3.2% estimate. Economic growth in the U.S. remains solid in the first half, but economists warn it may be the calm before the storm.

Tariffs at their core are a tax on the US economy. U.S. consumers and U.S. manufacturers that source many key supply inputs for their finished products from China’s factories, will be footing the bill for the 25% tariffs.

Federal Reserve Stuck Between A Rock and A Hard Place

Downside risks for the U.S. economy are rising.

There is no inflation today. Next quarter or next year could be a different story. The trade war is sending producer’s costs higher. The consumer is going to have to foot the bill.

  • At the conclusion of the April 30-May 1 Fed meeting, the Fed left its key benchmark Fed funds rate unchanged at 2.25% to 2.50% in a continuation of its “patient” policy.

Up or down, which way will interest rates go next? Never before, has the picture at the Fed become so muddled. On one hand, the Administration is putting political pressure on the Fed to lower interest rates. And, the Fed may need to lower rates as the trade war slows U.S. economic growth.

On the other hand, the higher consumer prices on thousands of everyday goods from the trade war will be inflationary. That could force the Fed to raise interest rates to tamp down inflationary pressures.

The Federal Reserve meets next on June 18-19 and for now no policy moves are expected. But, the second half of 2019 will create tough challenges for the central bank.

The Bottom Line

The escalating trade war is just another reason for investors to diversify up to 10 or 15% of their total portfolio in the safety and security of physical gold.

Predicted Price Trading Bands, Next 90 Days

Gold $1,275 -$1,325

Silver $14.25-$15.00

Our Recommendations

The high-end rare coin market remains an attractive buying opportunity for long-term investors. Rare coins offer investors an opportunity for significant price appreciation in the current environment.

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