The market is stuck in a big trading range. Volatility is strong but we seem stalled. There are lots of minor issues but the one recurring theme is trade. The administration announces tariffs on steel and aluminum, and the market crashes; the actual tariffs are much less than expected, and the market rallies.
The administration declares a trade war against China, the market crashes; the China negotiations appear to be going much better than expected, and the market rallies. So, Trump says he isn’t happy with his negotiators, the market crashes; now they are talking about tariffs on cars, and you guessed it: the market crashes. There is certainly a pattern.
Thus far the trade reality is much less dire than the trade banter coming from the White House. However, that banter can have a very negative impact. Economics in the real world is not the cold social science many academics make it out to be. Psychology plays a very big role.
In the 1992 movie “Sneakers,” Robert Redford and Ben Kingsley play college friends now fighting each other over control of a device that can break any and all encryption. With it they can hack into any computer and potentially do anything. In one scene Kingsley’s character discusses the fragile nature of our system. The example he uses is a bank, a conservatively run, financially strong bank. Simply start a rumor that the bank is not financially strong and then people will begin to withdraw their money from the bank. Soon the bank actually is on the brink of failure. Trust keeps banks in business. No financial institution can survive a run on the bank, and runs on banks are almost always caused by emotion, not anything “real.”
The truth is, all people make decisions based on emotion and then, to varying degrees, try to support their decisions based on facts. Business leaders are not immune. If Trump gets what he claims he wants in terms of tariffs, it will have a negative impact on economic growth. I have my doubts as to whether what Trump tweets and what he really wants are the same thing, but it may not matter.
If business leaders in companies small and large are planning for the future and they believe tariffs are coming, then they will be less willing to invest in their businesses. If they are less willing to invest in their businesses, then business will slow. So much of what happens in economics is a constant cycle of self-fulfilling prophesy. If we believe the economy is good, then we will spend and invest and the economy will be good. If we believe it is bad, then we will delay spending and investment and the economy will be bad.
Thus far all this trade talk has done is stall the market. Trump tweets and down we go; the facts come out and back up we go. The end result is a bumpy ride to nowhere. This will end, and when it does, the market will choose a direction. That direction will depend on what people believe about the future prospects of our economy. That fate is now resting on the outcome of trade negotiations, and what the president decides to tweet about them.
Either way, we will be ready to act. Stay tuned.
Chuck Osborne, CFA