Worst Day Since...

By: Edward J Leach, CFP®, MBA

The markets took a tumble last Thursday – the Dow Jones Industrial average falling more than 700 points, or about 3.0%.  This marks the worst day in the market since February 8th.  Yes, February 8th of 2018 – doesn’t seem like we are making history here.

Alas, CNBC’s headline Friday morning was “Dow drops more than 700 points on trade fears, posts worst day since Feb. 8th.”

I can poke fun all day at the “Breaking News” headlines. In reality, the recent volatility in the markets, as well as the volatility in the political realm, have caused a bumpy ride for investors.

And let’s face it – it hurts.

This past week’s culprit for the volatility is the news of President Trump signing an executive memorandum imposing retaliatory tariffs on up to $60 billion in Chinese imports.  Essentially, the new measures are meant to penalize China for unfair trade practices. 

Although the markets sold off on this news, there has been increasing pressure on Capitol Hill to protect American businesses against China’s infringement on intellectual property rights. Ian Bremmer, a political scientist and President and Founder of the Eurasia Group, stated in a recent PBS News Interview, “the corporate community has been increasingly saying to the Trump administration, you need to be tougher on China.  We’re not getting reciprocity. We don’t have market access. They’re stealing our intellectual property. It’s really challenging for us to do business there, and we need someone to be tougher.”

On Friday morning, China’s Ministry of Commerce announced its own set of proposed tariffs on U.S. goods, which had an import value of $3b in 2017.  While Chinese officials didn’t specifically reference the US tariffs aimed at Chinese goods, it’s clear the Chinese tariffs are a response to the US tariffs on steel and aluminum imports announced earlier this month. 

To add another level of complexity, US allies were not thrilled with tariffs on steel and aluminum either.

Like all standoffs it comes down to who has more to lose. The US and China are two economic power houses and every decision made has a ripple effect across the globe.  Are there legitimate issues that need to be addressed here? Definitely.

The hope, and our belief, is that cooler heads will eventually prevail, and we are not headed for a full-blown trade war.

I started to write this article on Friday, and not to claim that I can foresee the future, but I woke up this morning to a Reuters headline that read, “Wall Street climbs as trade war fears cool”.  Turns out reports are saying the United States and China are willing to negotiate tariffs and trade imbalances – sounds like a reasonable approach.  Definitely not as eye catching as the following two headlines:

CNBC – March 15, 2018 – “China is ready for a trade war with the US – and it could hurt Americans”

The Washington Post – March 23, 2018 – “China slams Trump’s ‘reckless’ and ‘arrogant’ tariffs, warns of retaliation”

Politics aside, the geopolitical climate is less then stable and any type of uncertainty or instability is never good for the capital markets.  In order for you to enjoy years like 2017, you need to be able to bear these periods of volatility and uncertainty.   What I know is investing in the equity market has paid off for investors over long-periods of time. I have a chart to prove it.

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