In last week’s Blog, I discussed the perception then that China wanted to avoid a trade war with the US based on pro-trade comments from China’s Premier Li Keqiang. But I also cautioned that avoiding a trade war would require China to make good on Mr. Keqiang’s promises.
By now it is clear that Mr. Keqiang was not speaking for China’s supreme leader Xi Jinping. Over the weekend and again on Wednesday, the Chinese government announced that tariffs on over $50 billion worth of US exports to China will go into effect when similar US tariffs begin.
The Chinese tariffs ranging from 15%-25% include over 100 US products ranging from key agricultural products (hurting Midwest states where Trump won, among others) to wine, nuts, steel products, aircraft, etc. It’s the latest move in the escalating tensions between the world’s two largest economies, which some experts warn could turn into a trade war.
This news sent US stocks sharply lower this week, with the Dow Jones plunging over 700 points on Monday alone. The selloff sent the Dow below 24,000 and the S&P 500 below 2,600, so this down move qualified as a “correction” of 10% or more.
The large trade tariffs threatened by the US and China have yet to go into effect. Some foreign policy experts believe there is still time for negotiations and suggest the tariffs could be avoided. I am not optimistic. I don’t see Trump or Xi backing off. I hope I’m wrong.
That remains to be seen, of course. Keep your seatbelts fastened!
Higher Market Volatility Could Be Good For Equities
For better or worse, stock market volatility has returned with a vengeance since late January, making the current environment much scarier than in 2017. Last year was atypically quiet with stocks rising steadily without major pullbacks and record low volatility. As such, many stock valuations were quite extended as we entered 2018.
Add to that the fact that the markets encountered a string of troubling news starting in late January. The first catalyst was a report that showed wages growing at their fastest pace in years. That spurred concerns that inflation, long dormant in the markets, could be returning and that the Federal Reserve might have to become more aggressive in raising interest rates to combat that environment this year.
Subsequent shocks came as President Donald Trump unexpectedly announced new tariffs on steel and aluminum imports and other proposed changes to trade policy, especially regarding China. This sparked sharp weakness in the technology and Internet sectors, which weighed on equities broadly.
The volatility has come in both directions, and big upward moves have been seen on signs that trade may not represent the headwind some investors fear or that the weakness in tech has been overdone. Still, the Dow and the S&P 500 were down over 10% earlier this week.
The Dow plunged over 700 points on Monday at the intra-day low, and then on Wednesday it rallied over 700 points from the session’s lows. This is crazy!
Stock market bulls still have plenty of factors they can count in their favor, including a solid economy, a strong labor market and quarterly earnings that are poised to grow at their fastest pace in years. Those factors remain in place despite the latest pullback.
It remains to be seen, of course, if this was a swift 10% correction which might prove healthy in the long-run and we return to more normal conditions. Or if we’ve moved into a more long-lasting period of extreme volatility. Or if a real trade war lies in our future. Or finally, if the market is indeed rolling over to the downside in a year to be highlighted by higher interest rates and tighter monetary policy.
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