Two Painful Days, Dow Down Over 700 Points
Thursday March 23rd, the Dow fell over 723 points, or nearly three percent. Friday the Dow sunk another 424 points, putting it into -10% correction territory from its January high, and posting the worst weekly performance since the week of February 9th.
It was a painful two days for investors; however, stocks dropped for some very good reasons. We are beginning to see financial markets absorb into their pricing mechanism the protectionist trade policy adopted by the current administration. The round of tariffs announced by the President on Thursday, on up to $60 billion of Chinese imports, may indeed bring Beijing to the bargaining table in the future, but their impact on global assets was immediate, swift and severe, and left little doubt that the benefits of global trade that have accrued to U.S. investors can be rapidly reversed. In response, China’s Commerce Ministry posted a list of 128 U.S. products on Friday morning that it was prepared to take retaliatory action against. On Friday afternoon the Chinese ambassador suggested that it may be prepared to scale back purchase of U.S. Treasuries as well.
It’s hard to contemplate the effects of a trade war in 2018 without thinking back to the Great Depression and the market crash that preceded it. Certainly, the overvaluation of stocks, margin-enabled speculation, overproduction in the industrial sector, and the contraction of money supply by almost one third were significant, but many economists agree that the Smoot-Hawley Tariffs, signed into law by President Hoover, and one of the largest tariff increases in U.S. history, turned what may have only been a recession, into a global financial collapse. To be fair, they were put into place by well-meaning men with the best intentions, to protect U.S. companies. Instead, they triggered a trade war that had the opposite effect. It crippled global industry, destabilized economic well-being around the world, and marked an entire American generation and their children with the stamp of deep and soul crushing poverty. And ironically, destroyed the very companies it set out to shelter.
We remain hopeful that this particular slice of history doesn't repeat itself, that the current unease in the markets is just an interim reaction, that the U.S and China will come to terms over the negotiating table, and that our leaders have absorbed the lessons of 1932, that the worst outcomes can come from the best intentions.
Steve Weber, Registered Investment Advisor
Eugene Balerna, Director, Investment Research