The market definitely got out on the wrong side of the bed yesterday! The Dow fell over 700 points, making Monday its worst day since January. The reason behind the steep fall: The U.S.-China trade war.
We talked last week about how the market panicked over the Trump administration raising tariffs from 10% to 25%, but here’s a quick recap:
On Sunday, investors got jittery over President Trump’s tweet that he would raise tariff rates on $200 billion worth of Chinese goods from 10% to 25%. The Dow opened 471 points lower on Monday — but anxiety over the trade war eased abruptly, causing buying pressure to increase and the Dow to swing from being down over 500 points to down just 66 points by the close.
However, those jitters turned into a full-blown panic after it was confirmed that the tariff hike could be imposed as early as Friday, raising concerns that a near-term deal would not be reached.
President Trump kept his word, and the tariff increase went into effect on Friday. So, this Monday, China retaliated with an increase of $60 billion on U.S. exports to China. It also didn’t help that the financial media added fuel to the fire by saying that China was going to dump U.S. treasuries.
So, let’s talk about what this really means for the market. First, we saw a big overreaction. According to my favorite economist, Edward Yardeni, in the past year the cost of goods in China has actually fallen 10% despite the tariffs. This is because the Chinese yuan was devalued to offset the tariffs and the U.S. dollar is strong. So, the tariffs had no real impact on prices. Obviously, 25% is a lot bigger than 10%, so we’ll see how this plays out.
And China is not going to dump U.S. treasuries. In fact, the 10-year Treasury yield is declining. Yesterday, it came very close to cracking 2.40%. So, we’ll see the market go down, but then it’s going to go back up because it’s going to yield more than anywhere else.
But China isn’t the only thing going on in the market right now. For example, earnings were good and were up for the first quarter. And because the 10-year Treasury is low and the S&P 500 is yielding over 2%, the market has a very good foundation under it. In addition, buybacks are relentless. We saw a record-breaking $270 billion in the first quarter, and the second quarter should be even higher because Apple (AAPL) already announced a $70 billion increase in share buybacks.
We’re in interesting times, and we’re going to be in this washing machine environment for a while. But at the end of the day, we’ll be OK.
Ignore the financial media because they’re just trying to scare you. The “smart money” did come in yesterday, and the market closed well off its lows. Then today, the S&P, Dow and NASDAQ all closed nicely in the green. This action confirms that there is a foundation for the stock market to build on.
The bottom line: Yesterday was an opportunity to buy the dip, not to run to the sidelines. The underlying trend remains strong, the U.S. remains the oasis around the world and the economy tends to boom in the spring.
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