Tariffs and Recent Market Movements
Anybody who reads the headlines knows by now that the markets have had a wild couple of weeks, and the S&P 500 is down two weeks in a row.
Having said that, the S&P 500 is down only 3.54% from it’s all-time high. In the bigger picture, this is a pretty modest drop for a market that is still up over 16% so far this year, and some analysts were surprised it wasn't worse, given the startling way the trade war with China escalated
There seems to be much confusion about how tariffs work. Yes, buyers of imported goods will tend to pay a higher price if the exporting company maintains the same pricing policies that it had in effect before the tariffs were levied. But many exporters will lower the prices they demand in order to offset the effectively higher price in the U.S. market, eating some of the tariff's bite in order to remain competitive.
Another alternative which we have already seen is that the foreign country might depreciate its currency, making its exports cheaper across the board and more than offsetting the impact of the tariff. This explains why China decided to stop defending the value of its currency almost immediately after the tariff announcement, causing the yuan to fall below seven to the dollar.
The result of the depreciation is that Chinese products will be instantly cheaper and more competitive around the world, regardless of the impact of U.S. tariffs, while Chinese buyers will have to pay more (in their currency) to buy American products. The Chinese buyers of American products are thus, indirectly, now paying a price for those tariffs.
Does the market drop signal the end of the bull market? Nobody can say for sure but it seems unlikely, given that the U.S. economy is still healthy by most any measure and is enjoying the effects of recent Fed stimulus through interest-rate cuts with more anticipated in the future. Second-quarter earnings on the S&P 500 (with 387 of the 500 companies reporting) stand at $42.13 which is comfortably ahead of the $40.70 forecast for the quarter. There doesn't seem to be an apocalypse on the near horizon, though of course we never know what the future holds. History has shown that when stocks suddenly go on sale due to a startling of the investment herd, it's more often an opportunity to buy, rather than a good time to sell.
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