By: Herbert Diamant
After the April 2nd “Liberation Day” tariff announcements, the reaction of the stock markets was swift to the downside, with a $3.1 trillion decline in market value. This major economic event upended many decades of stable trading relationships between countries friendly to the United States. The core theme is that China continues to exploit the United States. We have seen this in their brazen intellectual property theft, cyberattacks on many companies, and dominance of supply chain sourcing across industries.
While it is important for businesses to fix their supply chain dependence on China, it will take years to reshore manufacturing back to the United States. These business decisions and resulting capital allocations need to be made knowing they follow a stable, long-term trade policy. Yet what is occurring is continuously changing tariff policies, which results in decision paralysis by corporate managers. It also is triggering a deep unease in consumer confidence, which further impacts businesses and ultimately, investment valuations in stocks.
Tariffs across industry supply chains will result in higher prices, creating inflation both initially and down the road. Much of the $439 billion in goods we import from China annually will incur a tariff tax as high as 145%. For those importers who can’t afford this tax, there will be breaks in the supply chain where goods do not reach consumers. Although consumers can survive with shortages of impulse items on store shelves, China is also a supplier of high-quality products that customers rely on for what they deem as essential for daily living, including drugs and electronics.
Despite this fundamental policy change, momentum investors began buying stocks, believing the China tariffs were merely a political talking point. If these speculators are right, they are investing at similar prices to the fully valued market prior to these tariffs.
Seasoned market technicians believe we are in a countertrend rally within a structural downtrend that was triggered by the magnitude of these tariffs. The old adage is that market bottoms don’t form on good news, such as announcing a delay of implementing tariffs. Momentum traders must be nimble because these types of rallies often quickly end with what is known as a “rug pull.” We have been observing volatile stock prices that abruptly swing 10% up or down, without regard to the fundamentals of the underlying stocks.
One thing these tariffs have shown us is the difference between speculative momentum trading and fundamental investing. Speculators act on the “fear of missing out”, while fundamental investors analyze markets for long term opportunities. It is noteworthy that Warren Buffett commented that while this recent market activity was not a recession, he continues to hold large cash positions, patiently waiting for real opportunities. The only certainty is that uncertainty reigns, and that feeling flows from the White House to business leaders to long-term investors. Even if tariffs were removed, the damage is already done to our economy, and it may take many months to unfold before a turnaround occurs.
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