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Income Seeker

Income Seeker: Proposed Tariffs Create Risks and Opportunities

By Income Seeker Team  | 2018-03-16 07:45:00.0

Tariffs Create Risks and Opportunities

By Robert Powell

Perhaps it’s just a negotiating tactic. Or perhaps it’s a line-in-the-sand proposal.

Either way, investment advisers say President Donald Trump’s proposed steel and aluminum tariffs create both opportunities and risks for investors seeking income.

“I think the market's response to the idea of tariffs reflects the potential risk to the economy, and subsequently investors,” says Nathan Erickson, the chief investment officer of MRA Associates. “We've already seen some foreign countries respond to the idea of tariffs with proposed tariffs of their own.”

And the end result, he says, will be higher costs for consumers which would lead to higher inflation. “For an income investor, this cuts both ways,” says Erickson. “Cost of living may go up, and at the same time the Fed may respond to higher inflation with higher interest rates.”

So, unless investors hold short-term fixed-income, he says, rising interest rates could lead to losses in fixed income securities, and the Fed slowing the economy could lead to losses in equities. “We're potentially in a unique moment in time where both stocks and bonds lose money while the economy is actually quite healthy,” says Erickson.

Other investment advisers say investors ought not invest on the basis of trade disputes.

“It’s a difficult game having unintended market consequences,” says Tom Stringfellow, the president and chief investment officer of Frost Investment Advisors. “These can quickly become negative consequences to those companies impacted by tariff talks.”

Stringfellow does think, however, there are “investable ideas” within the materials sector, including steel, for the longer term. “This is based on the concept that there is a longer-term need for infrastructure rebuild and I suspect that is inevitable,” he says.

“Not sure if it does materialize under the current administration, given recent hiccups, but it will happen if we want to stay competitive.”

For income investing, though, this does require patience, says Stringfellow. “I think the key is to identify those securities that have attractive yields, market and better; consistency in dividend payments and growth in payouts; and more importantly, targeting companies that have growth prospects not dependent solely on today’s headlines,” he says.

“They can indeed provide great entry points but also can be next week’s regret.”

Another expert also feels that increasing tariffs, generally, could lead to a trade war.

"This could raise input costs for U.S. manufacturers and hurt corporate earnings," says Gene Goldman, the chief investment officer of Cetera Financial Group. "Also, these costs would be considered inflationary, hurting holders of bonds."

The positive news? Those planning to buy bonds, says Goldman, would get higher yields in an inflationary environment.

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