I don’t know about you, but I tend to worry about things that probably wouldn’t faze the average person. Worrying is a habit that I’ve had for as long as I can remember, but the practice, for the most part, has worked. Nothing catastrophic has happened. So how does someone with this mindset come to terms with a 9½-year stock market expansion marking the longest in history. With market cycles typically lasting from four to seven years, I could have started worrying about five years ago — and for sure starting two years ago.
But I recall the prevailing view in the mid-2000s, which was “to not take the punch bowl away while the party was still going on.” As a party animal, it has made sense to me to remain invested. But enough anxiety has prompted me to segue toward large, dividend-producing stocks that would still crank out something of value even if the share price dropped for a period. I have kept some individual stocks for sheer entertainment value and diversified with some international mutual funds and increased bond-fund holdings. Now I just grip the arms of my chair as tightly as possible and wait.
What could, in fact, go wrong? Consider the possibilities. We have a growing trade war, rising interest rates, a slowing housing market, mid-term elections, the psychological and fiscal impact of a rising deficit, stock values at historically high price earnings ratios, and finally, an expanding real war that has prompted military expenditures to increase by over 20 percent.
If I have to bet on one component, however, I’ll go with a trade war set in motion by tariffs. I lack confidence in the administration’s effort to bluff our way around our trading partners, and the early signs are confirming my misgivings. The threat is already affecting the auto industry as its efforts to plan ahead are being complicated by future uncertainty. What appears to be shaping up in the way of a plan is the notion of selling cars only in the country in which they are manufactured. This is a marked departure from an industry that has benefited from worldwide cross-pollination of resources. The result has been economies of scale as cars built in one place could be sold anywhere. The concept of “comparative advantage” holds that some countries can manufacture things cheaper than others. Your leather-wrapped steering wheel was possibly stitched together by people in Eastern Europe. The net effect has been better cars for less money than anything a world of tariffs will provide.
The administration seems to be turning a deaf ear to complaints from manufacturers. As Secretary of Commerce Wilbur Ross told them, “We can’t predict how other counties will respond to our tariffs.”
Although the candor is refreshing, it is a surprising statement coming from someone who should be applying some game theory to gauge the impact of how our tariffs on everyone else will affect their tariffs on us. Folks in Elkhart, Indiana, where 80 percent of recreational vehicles are manufactured, are not happy with the prospect of additional costs of aluminum and steel. Everyone from lobster trappers to soybean farmers is living in a world of uncertainty at this point, and we have yet to see our imposition of tariffs driving even our friendly allies to the negotiating tables. Meanwhile, our secretary of commerce is being sued for overcharging investors in his money management company, so he may be distracted just when we need him the most.
In short, the trade war is now upon us. We have met the enemy, and it’s us.