Roller Coaster Continues in Rough Week for Stocks
The Trump administration outlined planned tariffs on foreign steel and aluminum this week. The move sent stocks into a sell-off mode, but seems to have somewhat stabilized as the week came to a close. For the week, the Dow declined 3.0% while the S&P 500 declined 2.0%. We wrapped up February with the S&P 500 declining 3.9% during the month. It was the worst month since January 2016 and broke a stretch of 15 straight positive months. That was the longest streak in over 30 years.
Tariffs create friction and added costs in an economy. I’m a believer that free markets create the greatest good for the greatest number of people. Billions of people globally have been pulled out of abject poverty because markets were allowed to flourish. Trade allows people, companies and countries to create what they do best and then sell that on a global scale. This has allowed developing countries with low labor costs to build manufacturing economies while allowing developed economies to enjoy lower prices on a variety of products. Trade does come with trade-offs though. Almost no clothing in manufactured in the US anymore because it can be done significantly cheaper in other countries. Many Americans who used to work in the textile industry lost jobs as a result. We’ve seen this in numerous industries, but the net benefit to the US economy has been a positive in my view. That doesn’t help people who’ve lost jobs; however, and that can spark a movement to implement protective trade policies.
Global trade is imperfect though. There is no question that the US faces tariffs in other markets that we don’t apply to products coming from those markets. While this isn’t ideal, the US has historically been a leader in promoting free trade regardless. We often accept and tolerate sub-optimal trade deals to keep markets open and trade occurring. There are also examples of countries violating the rules of trade agreements that frequently go without significant penalty. Potentially Trump is trying to force other countries’ hands, but this feels like a dangerous economic game to play. The tariffs announced this week aren’t the final versions and it’s possible changes will be made before finalized. While the effects of these particular tariffs likely won’t be broadly felt by US consumers, the risk is what other countries do in retaliation. Especially since these weren’t targeted tariffs against China and others who are often accused of cheating in global trade. The proposed tariffs apply to all countries including some of our best trading partners. The last thing the global economy needs is a trade war that sees overall economic activity decline as a result.
Oil decreased 3.4% this week to close at $61.38/barrel. The yield on the 10-yr Treasury ticked lower to 2.86%. The average rate on a 30-yr fixed rate mortgage moved higher again to 4.43% from 4.40% a week ago.