Market Minute - August 13, 2019

Tariffs and Market Movements

Anybody who reads the headlines knows by now that the markets were volatile last week.  The broad market ended the week lower as global headlines continue to grab investor’s attention.  In the bigger picture, this is a pretty modest drop for a market that was up 17% so far this year. 

Trade and tariff news are back front and center as President Trump has announced additional tariffs on Chinese goods starting September 1st.  The question for investor’s now is, how will companies respond to the additional tariffs and what sectors are impacted the most?

Buyers of goods will tend to pay a higher price if the exporting company maintains the same pricing policies that it had in effect before the tariffs were levied.  But many exporters will lower the price they demand in order to offset the effectively higher price in the U.S. market, eating some of the tariff's bite in order to remain competitive. 

An alternative is that the foreign country might depreciate its currency, making its exports cheaper across the board and more than offsetting the impact of the tariff.  This explains why China decided to stop defending the value of its currency almost immediately after the tariff announcement, causing the yuan to fall below seven to the dollar.  The Trump Administration seemed to be caught off-guard by the move, and immediately branded China as a currency manipulator--a charge that would be hard to prove since the drop was entirely due to the movement of currency markets.

The result of the depreciation is that Chinese products will be instantly cheaper and more competitive around the world, regardless of the impact of U.S. tariffs, while Chinese buyers will have to pay more (in their currency) to buy American products.  The Chinese buyers of American products are thus, indirectly, now paying a price for those tariffs.

Does the market drop signal the end of the bull market?  Nobody can say for sure, but it seems unlikely, given that the U.S. economy is still healthy and enjoying the effects of a recent Fed stimulus.  Second quarter earnings on the S&P 500 (with 387 of the 500 companies reporting) stand at $42.13, which is comfortably ahead of the $40.70 forecast for the quarter.  There doesn't seem to be an apocalypse on the near horizon, though at any moment the long bull market could turn bearish for anywhere from a few quarters to a year or two.  History has shown that when stocks go suddenly on sale, due to a startling of the investment herd, it's an opportunity to buy, rather than a good time to sell.  But for the next few days, the markets will have our attention, even if there is no plan to take dramatic action.

 

 The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual.  Where applicable, all data and information has been gathered from sources believed to be accurate such as the internet, nonaffiliated 3rd parties, news articles and professional subscriptions but this information is not warranted to be correct, complete or true.    

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