So, a participant in one of our 401(k) plans with more than $1 million in her account called me in a panic to ask if she should roll all of her money into a money market fund. She was rattled by the consequences of the trade war that is now underway. From what she had been hearing, it sounded like the world was going to hell in a hand basket. This is true of any perceived threat to market resilience.
At times such as this, I always fall back on Warren Buffett’s comment suggesting that we consider all of the catastrophic events that have happened since 1900, when the Dow was at 50. In spite of all the wars, depressions, recessions and countless doomsday scenarios, the resilience of the human spirit has always prevailed and markets have followed suit — rewarding those who stayed the course.
Fortunately, goods that involve tariffs involve a very small percentage of our GDP. But, what drives stock market values is the behavior of crowds, and it doesn’t take many like-minded souls collectively freaking out to trigger a market collapse. Add to this the market’s traditional “summer doldrums” and the stage is set for potential disappointment.
So what? We’re all sitting on stock market values that have exceeded what would have been normal expectations. It wouldn’t be the end of the world to give back a few arguably unwarranted gains. We can limit the downside by shifting toward bond funds and large-cap funds owning companies that pay dividends — a better option than a flight to cash.
As for tariffs, there’s an argument for doing away with them completely. Steel tariffs, for example, partially may save 140,000 jobs (assuming that tariffs alone save all these jobs), but this doesn’t address the 6.5 million jobs in steel-consuming industries. Agriculture, dairy products, and other commodities are all impacted by tariffs, so it remains to be seen how this will all play out and be reflected in stock market values in the coming months.
Meanwhile, Veronique de Rugy makes the case in a New York Times opinion piece for dropping all tariffs. Countries with freer trade have higher per capita incomes and productivity growth. Tariffs that protect jobs cost consumers far more than the jobs are worth.
If you believe economists and libertarians who agree that tariffs cost more than they are worth, it is comforting to realize that little has been accomplished in Washington on any front. Promised “deals” that just haven’t happened are as follows: Health care, NAFTA, China, metal imports, Syria, Middle East peace, Pacific trade and climate change — to mention just a few. This dysfunction is preferable when viewed through the Jerry Brown prism of, “Less is more.”
The saving grace going forward may be that nothing will happen in the way of tariffs if many Republican lawmakers have their way. An acrimonious meeting with Wilbur Ross, the commerce secretary, left congressional leaders shaking their heads. They complained about what tariffs were doing to the agricultural and manufacturing sectors of their states. Ross was unmoved as he said, “We have no control over what another country does in retaliation.” No kidding. It might have been wise to consider that reality before setting in motion a force over which “we have no control.”
The stock market seems to have second-guessed the outcome in recent days as companies such as Harley-Davidson have determined that they need to move production overseas to avoid a tariff that will add $2,000 to their sales price. The stock just dropped by around 6 percent. Overall, the markets are beginning to respond to the uncertainty.
With more to come, an administration consumed by its own self-interest will undoubtedly back off and flounder around some more as it searches for a “path of minimum regret” — an approach that antagonizes the smallest number of voters. The uninformed ideology of this administration’s economic “experts” should reveal its limitations before much damage is done. In the meantime, we wait.