Are we in a bear market? Is this simply a correction of the markets? Well, at one-point last week the DOW was down about 10.5% before correcting and heading back up a bit. But being down 10% is not new for this market we are in right now as we have seen this before. According to most a decrease of 10% means we are indeed in a correction. So we must ask ourselves, will this go beyond a bearish correction into a full blown 20% loss and recession?
The answer to that is anyone’s guess, and I am not about to try and predict what the markets will and will not do. I do know that regardless of your political stance you need to be concerned about what is happening in Washington and around the world. First, we had a tax cut that was not really necessary or beneficial in nature. When the economy is strong as ours was when they enacted the tax cuts it does not do much to stimulate an already prosperous economy. Tax cuts have almost always been done when the economy is struggling and needs some assistance in getting better or stronger. And as we have seen, a few companies took their tax cuts and spent a portion on salaries, hiring or capital expenses. But a majority have raised dividends or increased stock buybacks to increase shareholder wealth. In fact, late last week the Federal Reserve gave its permission to over 30 of the largest banks to increase their dividends. That is a direct result of a strong economy and the tax cuts that companies benefited from, and it also means the money that is funding the increased dividends is not money that could go to loans to strengthen our economy.
Then you have the protective tariffs that Washington wishes to impose on countries that it feels has unfair trade practices with the US. However, these tariffs are not really having that much of an effect on countries that it was designed to target as we have also gone after our allies not only in trade but political support like Canada and the European Union. I am starting to think that last week was one that will stay firmly implanted in my mind for many reasons, those already mentioned, and then there were a few additional announcements concerning jobs in the US. First, due to the steel tariffs, a small business in Missouri is looking at closing and laying off some 200 of its employees. So you may be asking why steel tariffs meant to protect US jobs is costing almost 200 at one small firm? The answer is simple, the steel they need to produce nails is costing them more, and they are not able to stay profitable and competitive.
Then there was the Harley Davidson announcement that it was going to move production of its motorcycles overseas to avoid a few things. One, like the nail company, the steel it uses was going to cost more due to the protective tariffs, and then the European Union raised its tariffs on US motorcycles from 6% to 31%. Now Harley’s sales in the US have been declining for a few years and have been growing in Europe, Asia, and Africa, so it has been shifting production overseas for a while now to reduce costs by producing the motorcycles closer to its end customers. But the protective tariffs by the US and the retaliatory tariffs by Europe made this an easy business decision for Harley Davidson.
The third announcement concerning the tariffs and US jobs came from GM. They announced that not only would the cost of the production of its US-based automobiles increase due to the steel tariffs but Washington’s proposed tariffs on foreign automobiles would have a negative impact on US automobile prices as well. And if all these tariffs were to remain in effect not only would it cost US companies money it would also lead to the loss of jobs here as well. Why? For the same reasons it costs Harley money, increased production costs and most likely our trading partners would impose retaliatory tariffs on our automobiles as well.
Are the trade deals that the US have bad or good? Well, it depends on how you look at the situation. Washington states it will demand that these trade deals be renegotiated to favor the US. That is fine in theory, but in reality, no country will agree to a trade deal with any other country that does not benefit both in some manner. In other words, no trade deal will ever be agreed to that is one-sided in nature. Trade and business do not operate that way. And please consider this as well. There are over six billion people in the world today, and the US accounts from some 330 million. If the trade deals that are in place for the US and our partners how is it that with less than 6% of the world’s population do we manage to have the biggest economy? Simple, the trade deals we have were created out of a system that was created after World War II by the US that indeed favors the US. If the trade deals were indeed so unfavorable to the US, we could not manage to have the world’s strongest and largest economy.
However, our status as the world’s best economy could be in jeopardy if Washington continues down this protectionist path of imposing tariffs. Yes, trade deals are meant to be examined from time to time to ensure free and open trade and competition around the world. As a nation built on capitalism, we need to acknowledge that unless the US continues to lead the world in innovation and avoid this protectionism mentality, we are destined to lose our spot as the number one economy in the world to China. Where we have 6% of the world’s population, they have almost 30% or five times bigger than the US. So it is no wonder China will be in a position to become the world’s biggest economy with little effort.
Trade wars are wars that have no winners, just losers. The US economy has been growing for nearly a decade now, and unemployment is nearing historic lows where we are actually in a position of having more jobs available than workers to fill them. Based on history, the market and the economy are due for a downturn of some magnitude. When and how that will occur is anyone’s guess, but with Washington going down this treacherous path of tariffs my guess is things will get worse sooner rather than later.
If you have any comments or talking points on anything I have discussed I would love to hear from you. Feel free to leave a comment here or message me directly and thank you for being a valued reader. As a thank, you, the reader who has the best comment will win a copy of my book, How the Stock Market Operates. Thank you, and I look forward to your comments.
