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Katherine Ross: After a massive selloff and more headlines surrounding the US China trade war, what should investors do now? Michael Reynolds Reynolds, Investment Strategy Officer at Glendmede joins me. Despite fears that Trump's tariffs are going to heavily impact the consumer, Walmart released an earnings beat and raise it's guidance for 2019. Can the strong consumer withstand the trade war?

Michael Reynolds: So I think we saw in the Q2-GDP report, that the consumers driving forward this economic expansion at this point, helping to withstand some of the weakness we've seen in the manufacturing economy. And we see the retail sales report this week or today actually, that, you know, we're beating expectations on that front. And, if we look at the structure of tariffs so far, instead of everything going into place on September 1st, the Trump administration is now announced that some of these bigger ticket items are actually going to face tariffs later this year. This matters because some of the biggest consumer events actually happened toward the end of this year. We're talking black Friday, Christmas sales. And those companies that are importing those goods are sort of getting their inventory on before the tariffs come into effect. And you know, this can help keep costs lower through that big, again, one of the bigger events for the year here. So I think the consumer is, you know, relatively healthy at this point, driving forward this record, economic expansion, and we expect to continue to see them to do so.

Katherine Ross: Now you mentioned the bigger ticket items like a lot of the tech items, are taken off the plate and the tariffs are expected to go on December 15th but we still have a lot of retail items that are expected to have a September 1st tariff. I'm wondering, do you think that September 1st tariff will stay in place?

Michael Reynolds: Sure. So, you know, and everything can change on a Tweet. That's the nature of where we are right now. You know, until we hear further notice, I think we have to assume that those tariffs are gonna go into place and have that incremental effect on making perhaps a subset of consumer goods a bit more expensive. But again, I think I want to return to the fact that the consumer is so healthy, so much driving forward this expansion at this point in time that we think they can withstand this sort of impact, you know, higher consumer goods at that point, whether it's apparel, toys, footwear, et cetera. The strength we've been seeing in that side of the economy should be enough to withstand some of this weakness.

Katherine Ross: So do you think that this will have any impact on GDP growth?

Michael Reynolds: Yeah, so we're looking at sort of tariff impacts overall on GDP growth. And when these go into effect, we're looking at about a 0.3 to 0.4% hit to GDP growth at this point. It's important to think about growth, and sort of the impact that tariffs can have on them on a rolling 12 month window where if we think about tariffs, they sort of have a permanent effect on potential GDP. So if you're looking at the level of GDP that sort of takes a hit once tariffs go into effect and sort of follows parallel to where GDP is going, as things go forward, assuming they stay in place on a sustained basis. But if you're looking at the growth in GDP, sure as you've sort of hit that little impact in the beginning, you'll see that impact on growth. But as you go beyond that 12 month window, you actually start to see it fall off of that growth.

Michael Reynolds: So, some of the tariffs we saw last year, the 50 billion, 25%, the 2 billion, their first traunch, the 10% on 200 million. Those impacts are actually starting to wear off at this point, just as the new tariff impacts are starting to come in. So you know, we're not seeing this as something that's going to blow off growth at this point. We still have a sort of healthy growth expectation well above zero for the US at this point. But it is just another incremental headwind that we're going to have to with sand at this point.

Katherine Ross: We saw a lot of volatility this week. Tuesday we saw the markets up, then Wednesday we saw the markets closed down 800 points on the Dow. With the markets turning like this on a dime, what is the most important thing that the average investor needs to keep in mind?

Michael Reynolds: So I think the average investors needs to sort of avoid the headline risk and sort of keep true to their longer term goals at this point.There are longer term asset allocation targets, whether it's between stocks and bonds. You know, try to avoid trading and timing the market. If you miss out on the five to 10 best trading days in a given year because you're trying to time the market, it can have a very material impact on your overall portfolio of returns. It's very hard to time the market and decide where it's going to go in any given day. There will be opportunities to take advantage of valuation disparities. This might not be the opportunity yet, so we're sort of recommending that investors sort of stay the course at this point. But sort of keep vigilant as we're seeing a lot of these risks sort of pop up on the margin.

Katherine Ross: Why should bonds keep the average investor up at night?

Michael Reynolds: Sure. So I think equity markets have sort of been conditioned to be watching the bond market, particularly the yield curve for signs that recession is coming. We've seen the two 10 curve or the three month, 10 year curve. Some people like to quote one or the other, but both are inverted or have inverted over the past couple of days. And we even saw the three 10 invert earlier this year. We've seen, tend to see that future recessions. But you know, at this point we're sort of discounting the signal that the yield curve is getting at giving us at this point. We're seeing some pretty big global dislocations in the bond markets, whether it's, you know, the German yield curve. The entirety of the Germany yield curve is in negative territory now. $16 trillion worth of global bonds are trading at negative yields.

Michael Reynolds: I mean, these are mind boggling sort of stats and there's a subset of the market out there that has to sort of buy, bonds on a sort of systematic basis. Whether the matching assets, liabilities, pension funds, insurance funds, they need to match their liabilities. So we're seeing a lot of buying pressure on global bonds. And if you're comparing the US yield to, you know, a German bond or you know, even some of the periphery bonds, like in Portugal, Ireland, Italy. US is the only place you can really get yield right now if you want safe less risky bonds. So that demand factor is sort of keeping US bond yields on the long end lower. We're seeing a bit of inversion there and we think it's largely because of this sort of technical factor, this global demand story that's giving off this signal. So we're sort of wondering at this point, if the global bond market or the US bond market in particular is sort of giving a false positive on a recession signal at this point.

Katherine Ross: That's really interesting. That's a different take than I've heard. So you think that there won't be a recession, the horizon just yet? You think that this might just be a false positive...?

Michael Reynolds: so we think it's a bit premature to be calling for a recession in the next 12 months at this point. Certainly global risks have risen. We've seen geopolitical tangents rising, whether it's Hong Kong or in Italy, a turnover in government. Perhaps we're seeing in a slowing manufacturing economy. That's bleeding a little bit over into the US but not enough to sort of knock us off of our global or our domestic growth trajectory at this point. We have an internal model where we sort of try to estimate the probability of recession within the next 12 months. We're currently seeing about a 20% chance of recession from that model at this point. It has risen over the last few weeks in sort of recognition of these rising risk we're seeing on the horizon. But it's just not the base case yet. But I think at this point investors sort of need to recognize that the probability is rising, perk their ears up and you know, be be watching for signals at this could take a turn for the worst,

Katherine Ross: 20% is still pretty low. All right, so the 10 year inverted briefly Wednesday morning. Looking at that and basing this off of what you just said about global bonds, how should the average Joe understand what happened with the inverted yield curve and what it means?

Michael Reynolds: Sure. So you know, I think of the yield curve, we try to compare the yield on shorter term bonds and longer term bonds. When you see shorter term bonds yield more than longer term bonds, that is historically been a signal that a recession is coming. Now this time around we're sort of recognizing that there's perhaps some dislocations in the market on a global scale that have been messing with the signal that we've been getting there. That is probably not giving the traditional signal recession that it has in the past. I think part of that is global demand with negative yields across the globe at this point with a German yield curve all the way out to 30 years, you're getting negative rates. You're basically paying for the privilege to lend the German government money at this point. Investors need yields and when they're looking for yields, the US is the only game in town. We have positive yields and we're a relatively risk-free sort of investment on the treasury perspective. That demand is bringing down the long end of the curve. On the short end, the Federal Reserve has been cutting rates. They did it for the first time last month and there are expectations that they're going to continue to do so in the future. And that short end of the curve is sort of influenced by Fed policy. So as we expect fed funds to sort of come down the rest of the year, the Fed funds futures market is pricing and a base case for two more rate cuts by the end of the year. So if we continue to see that short end come down, we might actually get to a bit more of an equilibrium in the longterm in the short term. So, you know, I think there's a lot of technical factors at this point that are driving this yield curve inversion. So I would be a little cautious in reacting to it too quickly.

Katherine Ross: Thank you so much.

Michael Reynolds: Yeah. Pleasure.

Between the yield curve inversion--which took place on Wednesday before the market opened. 

Michael Reynolds, investment strategy officer at Glenmede, sat down with TheStreet to talk about the strength of the consumer.

So, taking a look at the tariffs, should consumers expect the remaining tariffs to stay in place for Sept. 1?

"So, you know, and everything can change on a Tweet. That's the nature of where we are right now. You know, until we hear further notice, I think we have to assume that those tariffs are gonna go into place and have that incremental effect on making perhaps a subset of consumer goods a bit more expensive," said Reynolds. "But again, I think I want to return to the fact that the consumer is so healthy, so much driving forward this expansion at this point in time that we think they can withstand this sort of impact, you know, higher consumer goods at that point, whether it's apparel, toys, footwear, et cetera. The strength we've been seeing in that side of the economy should be enough to withstand some of this weakness."

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