Stocks Drop as Tariff Noise Rises
Markets experienced significant declines last week. The S&P 500 lost 5.95% and the Dow dropped 5.66%. With these losses, all major domestic indexes had their worst weekly performance in more than 2 years. International Stocks also declined, giving back 2.64%.
What caused markets to stumble in this way? While various economic reports came out and the Federal Reserve raised rates again, another topic triggered the declines: trade war concerns.
Weekly Focus: Analyzing Tariffs and Trade Wars (or at least a Clash)
Last week, President Trump approved new tariffs on China, reportedly at least partly as a punishment for taking American intellectual property. The tariffs could affect as much as $60 billion in Chinese imports - and Trump called this the "first of many" trade actions against the country.
China indicated that it may retaliate and is "looking at all options" on how to respond. Apparently, everything is on the table - including targeting 128 American products, no longer purchasing U.S. Treasuries, and taking legal action through the World Trade Organization.
How did investors respond?
The new China-specific tariffs combined with Trump's steel and aluminum tariffs earlier this month create growing concerns about a trade clash. The market declines we experienced last week are largely a reaction to these fears.
What might happen next?
These new tariffs have the potential to create 2 very different results:
1. A trade clash that slows global growth
2. A more even playing field for American companies
A trade clash: If the U.S. and China go back-and-forth adding punitive tariffs to each other's products, our economy could suffer. We could experience inflation, slower economic development, and higher interest rates, making expansion and growth harder for U.S. businesses.
A more even playing field: If the tariffs are successful, U.S. industries could benefit. Some U.S. steel producers are already boosting their production and hiring as the first round of tariffs goes into effect.
Where do we go from here?
Although the probability for a full-blown trade war is low, we could get a significant trade clash, which could negatively affect the global economy. But this worst-case scenario is far from certain, and many opportunities exist to calm the rising tension. For now, we will continue analyzing exactly what is happening with tariffs and how different countries react.
In the meantime, U.S. equity markets continue to consolidate and digest the significant gains made in the last two years.