The Markets Go On Sale
It’s fair to say that the Trump Administration’s tariff announcements have not had the desired effect — at least, not immediately. The S&P 500 fell 2.7% on Monday after dropping more than 5% the previous week. Investors are clearly rattled about the uncertainty of waging escalating trade wars on America’s biggest trading partners, and there are additional concerns that the trade barriers being erected in retaliation could lead to a recession.
Since the end of World War 2, American companies that export goods have been at a disadvantage due to tariffs being leveled on it by almost all its trading partners. We don’t hear much about this in the media or from the government in general, but it has been going on for a very long time and addressing it is long overdue.
A recession is actually overdue; we experienced a brief economic downturn during the early stages of the Covid pandemic, but outside if that blip, the economy has experienced unusually smooth sailing for more than a decade. A correction (a 10% decline) is also overdue. The markets have gone 340 trading days without one, but on average these downturns have manifested every 173 days.
Overdue is not destiny, of course. Before the talk of trade wars and the new administration’s efforts to “right-size” the U.S. federal government, it really looked as if the U.S. Federal Reserve had managed to execute a smooth economic landing, and this could still happen. There’s no evidence that companies—even if they have to raise prices to pay for the friction caused by tariffs in their cross-border supply and manufacturing chains—are any less valuable today than they were a week ago. And indeed, one explanation for the recent selloff had nothing to do with valuations; the Fed backed off cutting interest rates as aggressively as some bull market investors had expected.
If we do experience a correction in the markets, it basically means that stocks will have gone on sale, generally for emotional (fear) rather than rational reasons. Those sales events typically don’t last long—the last bear market, in the first quarter of 2020, lasted just 33 days, and the average since 1929 has been roughly nine months. Most investors are inclined to sell their stocks during these times of fear and uncertainty, but history has shown that buyers who are capable of swimming against the tide end up with higher returns in the long run.
