“Wall Street exaggerates everything.” — Stock Market Maxim
Historically, wars have hurt the stock market. When Europe erupted in the Great War in the summer of 1914, Wall Street was closed for six months — even though the United States did not enter the war until 1917.
The markets also stagnated during World War II, the Vietnam War and the invasion of Iraq.
Wars hurt the economy because they are expensive and because they shift resources from productive investment to killing machines.
While the market wants to go up again, it is facing a new war — Trump’s trade war. And this one looks like it will turn out like how the war in the Middle East has been faring, never-ending with no good results. In the end, a trade war will cost manufacturers, farmers, tech companies, banks and airlines billions of dollars and will inflict consumers with higher prices.
President Trump’s trade representatives have promised that a new trade agreement with China will mean more U.S. exports and stronger intellectual property rights. However, the remedy may be worse than the disease if the negotiations with China ultimately result in permanent new tariffs, which are nothing more than another series of taxes on the people of both countries.
Fear the ‘Tariff Man’
The Smoot-Hawley Tariff was imposed in 1930 and worsened the Great Depression. Now Mr. Trump, calling himself “The Tariff Man,” boldly declared, “When people or countries come in to raid the great wealth of our nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power.”
Mr. Trump may not fully appreciate the benefits of trade as a tariff-driven trade war could set back the United States 80 years and hurt China’s economy as well.
There also is a growing fear that the Fed is raising interest rates too far, too fast. Investors have begun to panic and are buying Treasuries. The fact that the yield on the 10-year Treasury note has fallen back below 3% again raises the prospect of an inverted yield curve. That often portends a recession and a bear market.
Investors seem nervous and emotional these days and are choosing to buy or sell based on the latest news rather than on fundamental economic indicators.
As Ben Graham often said, “The market is a voting machine in the short run; a weighing machine in the long run.”
While this Trump trade war escalates, I suggest you use this opportunity to buy income-producing stocks at bargain prices. As I said in my headline in the December newsletter, “Income Stocks Perform Best During Market Sell-Off.”