Dow Slips as “America First” Puts Stability Second
President Trump has let slip the dogs of trade war. Investors are crying havoc.
Against the vehement advice of his economic advisors and political allies, Trump suddenly announced new tariffs on Thursday. Most corporate leaders immediately voiced opposition.
Markets plunged on Thursday and extended their volatility into Friday.
The Dow Jones Industrial Average closed in negative territory Friday, marking the fourth consecutive day of declines. The S&P 500 and Nasdaq inched into the green in the final minutes of trading, after flirting with sharp losses all day.
Friday was a roller-coaster for stocks, with the Dow down nearly 400 points at the session low. About 65% of S&P components are now in correction territory.
Investors are rattled by the prospect of a ruinous trade war.
The financial community loves tax cuts and remains grateful for the massive tax overhaul signed by the president in December. Shareholders will reap a windfall. S&P 500 firms are expected to buy back $800 billion of their own shares in 2018.
But investors almost universally despise tariffs. With good reason. History shows that trade barriers raise the cost of goods and result in destructive tit-for-tat action, without generating new jobs domestically. Downstream producers of steel and aluminum products, including automobile, aircraft and consumer goods manufacturers, say it will hike their costs. Canada and the European Union have vowed retaliation.
The shares of U.S.-based multinational blue chips that rely on steel and aluminum for their manufacturing processes plummeted on Friday. Declines in the industrial sector outpaced the overall market.
President Trump on Thursday announced that he would impose aluminum and steel sanctions next week. There was no “roll out” of the new policy. The White House has not conducted a legal review of the tariffs. The president simply stepped up to the microphone and informed the world of the new tariffs, in off-the-cuff remarks to reporters.
“The WTO has been a disaster for this country,” Trump said Thursday. He argued that China’s economic ascent was due in large part to its entry into the World Trade Organization. “It has been great for China and terrible for the United States, and great for other countries.”
White House officials were caught off guard. So was Wall Street. The Dow on Friday extended its losing streak that began on Tuesday.
Trump said he would set tariffs of 10% for aluminum imports and 25% for steel imports. The target is China, but vital trading partners such as Canada that are major steel and aluminum producers would get hit as well.
Canada was America’s most important steel partner in 2017, with a total of 5.7 million metric tons flowing across the border (see chart):
Maple leaf rag…
Trump tweeted on Friday:
When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!
“Trade wars are good.” That sort of language is profoundly unsettling to Wall Street. Hence the carnage this week in stocks. Volatility has replaced stability.
Tariffs push up the cost of goods. Those costs trickle down to consumers, or reduce corporate profits if manufacturers absorb the costs. Steel and aluminum, of course, are used in a vast array of products. But there’s also a national security component. America’s defense contractors import those materials for combat jets and other weapons systems. Boeing (NYSE: BA) on Friday fell 1.43%. Chicago-based Boeing is the largest aircraft maker in the world.
To quote the philosopher king Bugs Bunny: “Of course, you know this means war.”
Our neighbor in the Great White North has angrily vowed to strike back. Jean Simard, chief executive officer of the Aluminum Association of Canada, said on Friday: “The President has just initiated an all-out trade war.”
Meanwhile, China is growing more assertive. Trump’s “America First” policy is prompting the U.S. to retreat from international agreements. China is rushing into the leadership vacuum.
This week’s announced tariffs came in the wake of similar actions. President Trump in January signed a measure that imposes tariffs on solar panel components and washing machines.
Here’s your takeaway: The market swoon that we witnessed in February is extending into March. The Dow has now fallen more than 2,000 points from its all-time high on January 26. The geopolitical order that has prevailed since the end of World War II is unraveling. The stock market correction isn’t over. Not by a long shot. Stay cautious.
Friday Market Wrap
- DJIA: -0.29% or -70.85 points to close at 24,538.13
- S&P 500: +0.51% or +13.58 points to close at 2,691.25
- Nasdaq: +1.08% or +77.31 points to close at 7,257.87
Friday’s Big Gainers
- ICU Medical (NSDQ: ICUI) +8.47%
Medical tech firm reports solid earnings.
- GAP (NYSE: GPS) +7.73%
Retailer beats on earnings.
- Microchip Technology (NSDQ: MCHP) +2.55%
Proposed merger lifts chip maker.
Friday’s Big Decliners
- Engility Holdings (NYSE: EGL) -18.46%
Engineering firm reports loss.
- Foot Locker (NYSE: FL) -12.74%
Retailer’s operating results disappoint.
- McDonald’s (NYSE: MCD) -4.77%
Analysts downbeat on fast food chain.
Letters to the Editor
“How does the new tax law affect the AMT?” — Norm S.
The alternative minimum tax (AMT) was changed but not eliminated. The new law increases both the exemption and the exemption phase-out amount for the individual AMT.
Beginning in 2018 and ending in 2025, the AMT exemption amount is increased to $109,400 for married taxpayers filing a joint return and $70,300 for all other taxpayers. The phase-out thresholds are increased to $1 million for married taxpayers filing a joint return, and $500,000 for all other taxpayers.
What’s your view on tariffs? Are they good, bad or something in-between? Please weigh in. Let’s get a dialogue going: email@example.com
John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.