After two positive weeks, stocks retreated on news the U.S. would impose tariffs on steel and aluminum imports. The S&P 500 shed 2.0%. The MSCI ACWI dropped 2.4%, and the Bloomberg BarCap Aggregate Bond Index was unchanged.
Markets reversed course last week as investors reacted negatively to comments by Federal Reserve Chair Jerome Powell and a Trump administration decision to impose tariffs on imported steel and aluminum.
The Trump administration’s decision on tariffs was the more interesting of the two. Investors became concerned the relatively free movement of goods and services between developed countries is at risk of reversing. The market reacted negatively, despite the narrow impact of the announcement, for a number of reasons.
- Global companies are organized to take advantage of the relatively free flow of goods and services. The tariffs are a step away from current policy and place sales and production strategies at risk if trade policy continues to tighten.
- Investors were anticipating key allies, including Canada, to be excluded from the tariffs. When they were not, it raised concerns that NAFTA and other trade deals, which impact a broad array of companies and industries, could be undermined.
- The broader range of companies included in the tariffs also raised the risk of reprisals, which could escalate into a trade war, among industries central to U.S. exports.
In our quarterly market update, we cited protectionism as a risk to market returns this year. Future trade negotiations will involve a fair amount of public posturing as each side hopes to strike the best deal. While economic fundamentals remain strong, this rhetoric is one more reason to expect a bumpy 2018.
Successful investing in our politically polarized world requires investors to separate their policy views from their investment outlooks. An investor may passionately believe the U.S.’s basic industries are faced with unfair competition from overseas competitors. He or she may be right, but the market may still react poorly to tariffs or trade tightening.
Recent elections have reminded us of two important truths:
- It is difficult to predict market reactions to political news.
- Politics aren’t nearly as important as fundamentals in determining the long-term direction of the market.
Whether you hold strong views on the current tariff controversy, the recently passed tax law, or all things Trump, make sure your investment outlook isn’t being driven by something far more important to boosting media ratings than determining the long-term outlook for corporate profits.
Key points for the week
- Stocks dipped on concerns that U.S. tariffs on aluminum and steel will undermine trade.
- Global stocks are geared to relatively low trade barriers.
- Successful investing requires separating policy views from investment outlooks.
Fun story of the week
One way to avoid getting a DUI after a night of drinking is simply not to drive. One resident in California took “driving” under the influence a little too literally and decided to “ride” under the influence instead. The man was pulled over by the California Highway Patrol as he was riding his horse along the freeway. While no animal or person was injured in the incident, police released a statement saying “they do not ‘horse’ around with DUI.”
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.