Anybody who reads the headlines knows by now that the markets plunged on Monday August 5th. The S&P 500 fell 2.98% and is down 5.83% over the past five days. In the bigger picture, this is a pretty modest drop for a market that was up 17% so far this year. Some analysts were even surprised the decline wasn’t worse, given the startling escalation of the trade war with China triggered by a newly announced round of tariffs.
Some were also alarmed at the assertion that the tariffs are a tax on China instead of the American buyers of Chinese products. The reality is that the assertion is not totally wrong. Yes, buyers of goods will tend to pay a higher price if the exporting company maintains the same pricing policies that it had in effect before the levied tariffs. But many exporters will lower the price demanded in order to offset the effectively higher price in the U.S. market, eating some of the tariff’s bite in order to remain competitive.
As an alternative to the pricing policy, the foreign country might depreciate its currency, making its exports cheaper across the board and more than offsetting the impact of the tariff. This approach explains why China decided to stop defending the value of its currency almost immediately after the tariff announcement, causing the yuan to fall below seven to the dollar.
The result of the depreciation is that Chinese products will be instantly cheaper and more competitive around the world, regardless of the impact of U.S. tariffs, while Chinese buyers will have to pay more (in their currency) to buy American products. The Chinese buyers of American products are thus, indirectly, now paying a price for those tariffs.
Does the market drop signal the end of the bull market? Nobody can say for sure, but it seems unlikely, given that the U.S. economy is still healthy and enjoying the effects of a recent Fed stimulus. Second quarter earnings on the S&P 500 (with 387 of the 500 companies reporting) stand at $42.13, which is comfortably ahead of the $40.70 forecast for the quarter. There doesn’t seem to be an apocalypse on the near horizon, though at any moment the long bull market could turn bearish for anywhere from a few quarters to a year or two. History has shown that when stocks go suddenly on sale, due to a startling of the investment herd, it’s an opportunity to buy rather than a good time to sell. But for the next few days, the markets will have our attention, even if there is no plan to take dramatic action.
Unsettling national and world events dominate media broadcasts. Markets fluctuate. If you ever have any questions or concerns, we are always available to help you understand the financial news you are hearing. Never hesitate to call on us at any time.
This article is for informational purposes only. This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or financial professional. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.