Stocks Decline Over Trade War Fears

The Dow had the worst day of the major indexes as it fell 1%. It underperformed because Boeing fell 2.5%. Boeing is a high priced stock which matters in the price weighted Dow. The S&P 500 was down 0.57% as it makes its way back to the mid point of the recent range. Boeing fell because investors were worried that China would target the company in retaliation to the American tariffs. If you are a long term investor who doesn’t believe the hype about a trade war, you are getting a gift to buy Boeing at these levels.

It’s very interesting that consumer staples were down 1.27% and consumer discretionary was down only 0.2%. I would expect consumer discretionary stocks to fall more because of the weak retail sales results. Utilities were up 0.97% and real estate was up 0.10%. This trade is occurring because yields are falling. The financials fell 1.2% as the yield curve flattened and the economy looks weak. The VIX was up 5.38% to 17.23. When the VIX is at 16, it implies a 1% move in the S&P 500 every day. I expect volatility to decline in the next few days. The biggest risk is tariffs. This is a headline driven market for the near term as news from the White House comes fast and furious. The latest news is that Larry Kudlow was picked as Trump’s Chief Economic adviser. Kudlow is a free trader; it will be interesting to see if he has any sway with lowering the tariffs. It’s important to recognize that the U.S. has very low tariffs. The countries threatening retaliation already have high tariffs. It’s possible that there aren’t retaliatory measures when the dust settles.

The chart below shows one analysis done on the effects of the steel and aluminum tariffs with Australia, Mexico, and Canada excluded. As you can see, 18 jobs are lost for every one gained. Clearly, this tariff is bad for employment, costs, and the consumer. Every state will lose jobs. In total, the net job losses will be 470,000. In the current economy, that doesn’t seem like something that could cause a recession, but it’s certainly worth monitoring. A trade war with China would cause a recession.

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