So You Want to Have a Trade War?

In my January "What's Going On With the Market" section I first noted some dark clouds on the horizon.  February saw me follow with a note that despite the good start to the year, fault lines were showing and negative divergences were seen in most of the major market indexes.  With these factors in mind, some changes were made to client portfolios that included the sale of some investments and the repositioning of others into positions with lower levels of expected volatility.  Then in March, after the market had fallen ~10%, I noted the potential for at least a short-term reprieve and possibly something longer.  While we did get a short-term reprieve, it appears that's all we're going to get. 

Yesterday afternoon in the White House Rose Garden, President Donald Trump announced a sweeping round of tariffs to be implemented on dozens of countries, some of whom are our closest allies and biggest trading partners.  Financial markets worldwide are almost universally down on this news, though U.S. markets appear to be falling at 3-4x the rate of other countries.  What makes this moment particularly difficult is the President's notoriously mercurial nature.  Might these tariffs be rolled back (or even eliminated) before I send this blog post out?  They may.  Or, perhaps, they will be combatted with a return volley of tariffs from those countries impacted.  We just don't know.  

What is known is preliminary estimates for first quarter GDP currently stand at -3.7%, a dreadful number.  Business leaders are frozen in place as they debate whether or not to change existing processes to survive in the new environment, or whether they should stick it out with their current modus operandi hoping the change is temporary.  Indeed, how can one decide if an investment of tens or hundreds of millions of dollars in a new manufacturing facility is "worth it" if that new facility may not be needed a month, year or even five years from now?  Trying to answer questions like these is an unenviable task.  

But, the problems do not end there.  With repeated suggestions of military invasions of sovereign countries/territories, verbal attacks on trading partners & military allies, etc. the Trump administration has now severely, and perhaps irreparably, damaged international relationships.  And while many would not argue some change was needed, it's probably fair to admit the way change has been pursued by this administration has rattled many.  One begins to question if the President, while in possession of a very good economic hand, is misplaying it.  As I've noted to clients the last few weeks, the U.S. has long been a "safe haven" for international investors.  Overseas money flowed generously to our shores as investors saw our markets as fair, orderly, and ruled by law & good reason.  These overseas investors were willing to pay premium prices for American stocks.  Furthermore, the dollar's status as the world's reserve currency allowed our country to borrow tremendous sums of money with little to no repercussions.  Recent developments may be the beginning of the end for these truths.  And while a system that took decades to build may yet take years to unwind, these same investors are beginning to take their money elsewhere. 

So, is it time to sell everything and flee?  Maybe.  Maybe not.  As I've also noted in recent months, much of our current woes can be fixed in a moment.  If President Trump relents on his tariffs, perhaps after other countries relent on some of theirs, financial markets would almost certainly stage a fast and spectacular rally.  Tax cuts remain likely and the falling stock market has sent interest rates tumbling (for the moment), as well. There is, most certainly, a path forward that sees the market at new highs in the coming months.  An investor must always see multiple potential outcomes and not get locked into one particular expected scenario.  Already, I find myself identifying prices where moving back into stocks would seem a wise idea.  Tomorrow's market leaders are almost certainly showing relative strength on a day like today; are you watching for it?  I am.  

Stock market corrections only "work" if they scare investors.  So, the question is, are you scared?  

The Trade War Cycle