Will The Rekindled Trade War Cause Another Stock Market Crash?

Retirement

What a difference a month makes! Just weeks ago the investment horizon looked clear for light years, stock were roaring, the global economy glistened with a golden-age-aura, and all seemed well with the financial world.

The sanguine outlook hinged on three critical linchpins:

  1. The US Fed’s late 2018 reversal on interest rate policy, switching from steely-eyed, hard-money rate increase ratchetting to a much softer stance, with even a wink and a nod of possible rate cuts, doggonit;
  2. The dogged persistence of US corporate profitability, and a petroleum kindling of more robust economic actively worldwide even under the weight of US trade war sanctions;
  3. The high probability of a comprehensive trade deal with China, putting the world’s second largest economy back on a firmly paying basis, and perhaps most importantly, restoring this high-quality, low cost manufacturing engine back to it’s critical place in the global economy supply chain

It will come as a surprise to very few that number three is now decidedly off the table, and that the blue sky, trade deal lock of early May has morphed into a “never gonna happen, the world economies and stock markets are so screwed” pallor.

Prospects for June do indeed look gloomy. Negotiations between the US and the Middle Kingdom seem suspended, the Trump team has switched trade tacks, leaving China in the cold and launching an effort to cozy up to erstwhile allies. Rhetoric out of China has likewise chilled, America-as-foe Korean War nostalgia is pouring out of the virtual Far Eastern woodwork, and the Chinese seem bent on embarking on a new “Long March” targeting the economic oppression of us capitalist dogs.

All in all, world events do seem to have put the kibosh on the bull market’s own seeming long march to perpetual prosperity.

Now, this humble observer still believes the odds of a near-term trade deal are high. The costs to US businesses and voters of the Trumpian tariffs are high, may shortly become caustic, and the Presidential election season is swinging toward full-throated pursuit of The Donald.  The Chinese leadership has its own pressing political pressures to cut a deal right quick, paradisiacal united workers’ songs of Communist solidarity with North Korea notwithstanding.

Of course, none of this means stocks will resume their meteoric rise. Investors, being human, fickle, irrational and emotion-prone, ultimately determine stock prices, and act on what they fear and believe, not on what is or will likely be. In the short term – all that the bleating herd typically sees – the market, as the Graham/Buffett school likes to put it, is a voting machine, and stocks alternately win and lose popularity contests. And, at least for stocks, the current voting fashion is swinging toward impeach.

For the near term, at least, it may be time to batten down the hatches. For those of us that incline more toward the Graham weighing machine model, it may be time to look at buying before long, but for now, it surely looks like rain. Consider the umbrella, and mind the rubbers.

Of course, even in the best of times investors need be wary of risk and missteps that can compromise their wealth. For a whitepaper by this author addressing these matters called The 9 Biggest Dangers Facing Today’s Investor and How to Avoid Them, click here.

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