“You're riding high in April
Shot down in May
But I know I'm gonna change that tune
When I'm back on top, back on top in June”
- Frank Sinatra
Not sure if Frank Sinatra was thinking about the stock market when he sang those words back in 1966, but they certainly seem apropos! Through April 2019, the S&P 500 was up 18.3% year-to-date; in May alone, the index has given back 4.6% so far though May 13!
On last Friday, the U.S. increased trade tariffs from 10% to 25% on $200 billion of Chinese goods. China then retaliated announcing an increase of tariffs on $60 billion of goods. Prior to this, the markets had accepted that trade negotiations were proceeding smoothly. Words like “constructive” and “candid” were tossed around like candy to children to appease anxious markets.
As of now, economists are producing all kinds of statistics to measure the economic and earnings impact this may have on the U.S. or global markets; they are all over the place! Not surprisingly, all the forecasts are negative, thus the negative market reaction.
However, these forecasts presume that the tariffs persist, increase, and never get resolved. No one knows, of course. But, I have faith in the market system and believe that whatever happens will end with a positive outcome for all parties; as in all good negotiations. What we are seeing here is a knee jerk reaction to the unknown. It is reasonable to be cautious, but the market could just as easily knee jerk in the other direction once this gets resolved - since it will; hopefully producing winners on both sides!
It takes a lot to produce a large market drawdown; this alone is not it – yet. We will continue to watch.