Stocks Plunge as Trade War Heats Up
President Trump today pressed the nuclear button on trade, not against rivals such as China but against America’s traditional democratic allies.
Stocks sharply fell today, as investors worried about a full-blown global trade war that engulfs friends and foes alike. The Dow Jones Industrial Average and S&P 500 racked up their fourth decline in five sessions. The Dow was down as much as 315 points at its session low. The CBOE Volatility Index (VIX), aka the “fear gauge,” jumped 4.42%.
The day wasn’t without good news. The latest data on personal spending and weekly jobless claims showed that the U.S. economy remains strong.
The headlines from Italy also were encouraging. President Sergio Mattarella said he would allow “populist” leaders additional time to forge a coalition government, a move that would preclude snap elections.
But Thursday’s news on trade swamped all else.
Colliding trade partners…
The White House today announced the imposition of 25% tariffs on steel imports and 10% tariffs on aluminum imports from Canada, Mexico and the European Union. The tariffs go into effect tomorrow.
The world is full of dangerous countries that wish America harm. But Canada, Mexico and Europe are America’s friends. Well, they were until now.
Trump’s decision on metal tariffs landed before Friday’s deadline for expiration of exemptions granted to the three entities. The EU immediately vowed to impose countermeasures.
If the EU does indeed retaliate, the precedent with China indicates rapid escalation.
When China last month targeted major U.S. imports in retaliation against U.S. tariffs on $50 billion of Chinese goods, Trump immediately ordered U.S. officials to identify an additional $100 billion of Chinese products the U.S. could hit.
Meanwhile, Mexico and Canada are locked in nettlesome negotiations with the U.S. on the North American Free Trade Agreement (NAFTA).
Trump says he wants to revamp NAFTA, but Mexico and Canada suspect that U.S. negotiators are sabotaging the talks as an excuse to abandon NAFTA.
Mercedes in the crosshairs…
News reports today revealed that President Trump informed French President Emmanuel Macron during their meeting in April that he wanted to effectively ban German luxury cars from the U.S.
Trump told Macron that he would pursue a tough trade policy against Germany “until no Mercedes models rolled on Fifth Avenue in New York.”
To describe the president’s goal vis-à-vis Mercedes-Benz, I’ll be charitable and use the word “impractical.”
The fact is, there is no such thing as a completely American-made car. The auto industry is complex and globally interconnected.
German carmakers Mercedes-Benz and BMW, as well as Japanese carmakers Nissan, Honda, and Toyota, employ thousands of factory workers in Alabama, South Carolina, Texas and other states.
G.M. derives more than 25% of its auto-related sales outside North America, while Ford gets a third. Chrysler was bought by Fiat of Italy. Cars of all types, made in a host of countries, increasingly contain Chinese-made parts.
Germany is the growth engine of Europe and automobile exports are the linchpin of the German economy. Trade barriers would dampen German growth, with a ripple effect on the global economy. Relations with a crucial American ally would suffer and U.S. jobs would be lost.
A fractured western alliance makes at least one person happy: Russian President Vladimir Putin. But corporate leaders are decidedly unhappy. Most U.S. businesses, aside from steelmakers, oppose the tariffs.
According to research firm FactSet, more than 200 U.S. firms this month have discussed the adverse financial impact of tariffs, during earnings conference calls with investors.
Over time, distortions will arise from the patch quilt of new tariffs. The cost of compliance will increase, weighing on corporate productivity and bottom lines.
Trade tensions come amid rising interest rates, during the latter stages of the U.S. expansion. When the effects of higher borrowing costs kick in, growth will cool. Tariffs will only worsen the downturn.
To be sure, Wall Street is grateful for tax cuts and deregulation. Yesterday, federal bank regulators introduced a proposal to weaken the so-called Volcker Rule, a cornerstone of the broader Dodd-Frank law passed in 2010.
The Volcker Rule is designed to rein in the sort of risky trading that triggered the 2008 financial crisis. The financial services industry condemns the rule as onerous. Bankers finally got their wish and saw the rule gutted.
But the price tag for these victories is getting steep. The Trump policy package includes protectionism. Investors are getting whipsawed on a daily basis by trade pronouncements that fly in the face of basic economic rules, if not common sense.
Until investors obtain clarity on trade, stock gains will be kept in check. But trade clarity remains elusive, perhaps unobtainable.
The upshot: Get defensive. Elevate cash levels in your portfolio (about 20% is generally appropriate) and keep 5%-10% in precious metals such as gold.
Avoid buying shares of companies that get hyped on financial television. Instead of watching bloviators on CNBC, I prefer watching baseball on ESPN. When the stuff hits the fan, the “story stocks” touted on TV tend to fall the hardest.
Thursday Market Wrap
- DJIA: -1.02% or -251.94 points to close at 24,415.84
- S&P 500: -0.69% or -18.74 points to close at 2,705.27
- Nasdaq: -0.27% or -20.34 points to close at 7,442.12
Thursday’s Big Gainers
- Viking Therapeutics (NSDQ: VKTX) +101.01%
Biotech’s drug achieves mid-stage clinical trial success.
- Kirkland’s (NSDQ: KIRK) +16.21%
Home décor retailer’s earnings beat expectations.
- LivaNova (NSDQ: LIVN) +13.33%
Analysts bullish on biotech’s prospects.
Thursday’s Big Decliners
- Clearside Biomedical (NSDQ: CLSD) -32.19%
Biotech’s key product clears late-stage hurdles.
- Build-a-Bear Workshop (NYSE: BBW) -14.97%
Specialty retailer’s earnings disappoint.
- Quantum (NYSE: QTM) -12.24%
Data storage device maker hit by slowing demand.
Letters to the Editor
“Does gold make sense now as a safe haven investment?” — Tom J.
As reflected by the announcements of new trade sanctions today, the unpredictable actions of the White House are a recipe for ceaseless market volatility. That spells “gold mania” for the duration of Trump’s time in office.
The price of gold hovers at $1,300 per ounce. Gold bulls say the yellow metal could peak this year at about $1,450/oz.
Questions about portfolio hedges? Shoot me an email: email@example.com
John Persinos is managing editor of Personal Finance and Radical Wealth Alliance, as well as chief investment strategist of Breakthrough Tech Profits.