Hello again everyone, I hope you’ll take a moment to hear this word of encouragement. Jesus isn’t concerned with how high or low the stock market goes. Not even a little. Jesus told us, He has gone to prepare a place for us and if it were not so, He would have told us. Now that is assurance or insurance we can actually count on! So, while our portfolio’s fall, I hope we all find comfort knowing He never will.
I won’t take long tonight but I thought it might be important to consider where the market is and what I think might be happening, bigger picture. However, please know that I’m speculating, same as you, based on my own research and knowledge.
Before I do though, here is a post from AmericanProgress.org, “Trump’s Trade War is a Major Economic and Strategic Blunder”. Take it for what you will. I generally lean more conservative but I just can’t see this playing out all that well. Then again, who knows, I’m wrong all the time.
How Low Will the Stock Market Go?
Let’s begin this post by trying to answer the question on everyone’s mind. That is, how low will the stock market go? Truthfully, I have no idea. Speculatively, I don’t think we’re quite to the bottom and we may not be for the foreseeable future but I think that depends on one of a few different outcomes. Let’s consider them.
Shock and Awe
First, before I talk about those outcomes here is how I view Trump. He, in my opinion, lives and dies by the “Shock and Awe” approach. I think this is just who he is and it’s why many of his own companies have boomed or outright failed.
What I mean is earlier this week when Trump announced sweeping tariffs he shocked the entire world. No one anticipated the level to which he was going to just start charging everyone. I think most believed he would enact significant tariffs on those he thought had the greatest economic advantage over us. I know I certainly didn’t expect such a long list with such lofty percentages. Still, he used tariffs as his weapon of choice this time around. Not the MOAB, he used during his first term.
He succeeded in shocking countries and global markets. First step complete.
However, that leaves us with the “awe” portion of this approach. How can he complete the equation? I think the “awe” side of this theory is really “aww”, as in, “aww, I’m sorry that happened”.
My real opinion, based on what I know (or think I know), is he simply hopes to minimize the trade deficit with countries that benefit the most from us. However, for this to happen, those countries have to play nice and not return the tariff favor. If other countries go on to levy huge tariffs against us we’re really right back where we started, only this time with higher costs across the board. No bueno for anyone.
With that, let me draw focus to the possible outcomes I mentioned earlier and what that might look like in the stock market or our portfolio’s.
Outcome #1 – Best Case Scenario
The first of these outcomes is if countries agree to operate at a deficit to the US. I don’t think Trump will accept any other agreement. Which of course means these countries have decided that American consumers provide a positive economic impact for their country. Certainly possible for a great many of the countries on Trump’s tariff list.
Hypothetically, if most of the countries were to agree, the US would have just pulled off one of the greatest trade moves of all time. We would have moved from deficit to surplus in one gigantic move and the stock market will respond immediately.
Of course, that assumes negotiations are swift and everyone plays well together. Which I think we can all agree, will never happen. If it did though, the stock market would be at all time highs before April is in the books. Honestly, if most of the countries on that list accept this agreement, I still believe the market will rebound promptly.
This is the very best case scenario and a really great outcome. Only time will tell how many of the countries from the tariff list are willing to accept that arrangement.
That said, there is also a downside, the day’s of buying cheap “knock-off’s” will pretty much be over. Our portfolio’s will boom but our day to day expenses will rise as well. This creates another large problem but we’ll table that discussion until we have any idea what happens with this tariff debacle.
Outcome #2 – Worst Case Scenario
As I mentioned already, the worst possible scenario is if every country views these tariffs as an act of economic aggression. Since, that’s really what it is. In that case, most countries would reciprocate with tariffs of their own and put us right back where we started.
I think this is what the stock market is currently indicating and what investors believe is most likely to happen. Realistically, If even half of the countries on Trump’s list reciprocate we’re really no better than we were and possibly even worse than we were. Since the stock market is a forward looking instrument, I think it’s pretty obvious future profits are in doubt given the extreme decline we’ve already seen.
If this is to be the outcome of the tariff war, the US as a country is really no worse off than we were. However, American’s are losers as prices rise to cover these new taxes. If we’re forced to only buy American, which honestly I like, we’re still paying more for items we currently get for less. Not really a “win” per se, because sometimes I just want the most economical version of whatever I’m looking to buy.
This is the “aww, I’m sorry” I mentioned earlier. Because it isn’t bad that we buy American products, it’s bad that either way we pay more.
In this light, the market correction stays down and possibly continues down for a good while as companies or investors wait to see actual financial numbers in the earnings announcements ahead.
Admittedly, a very logical outcome in light of the sweeping tariff changes.
Outcome #3 – Most Likely Scenario
As you may already have guessed, the most likely outcome will probably be somewhere in between those two extremes. Obviously, outcome #1 would be the most favorable so that our country isn’t sinking further into the financial abyss. But outcome #2 is way more realistic.
Regardless, the truth is usually somewhere in the middle. In that middle, the best case scenario is we get enough countries to agree to operating a deficit that in aggregate, we operate at a surplus. That would still be a win for us as a country but also a loss with regard to higher prices.
In this scenario, the market free fall would grind to a stop and we would start the slow path higher again. Doesn’t it almost feel like we knew this was the outcome before all the drama?
In any case, this scenario may still generate a protracted bear market as other countries negotiate final trade terms with the US. Once the majority of deals are made the bear market will end and we’ll start the slow march higher, eventually (sometime years from now), reaching new all time highs and beyond.
Final Thoughts
In the end, everything I just rambled off is just my opinion of what I think could happen. I really have no idea but these outcomes seem both logical and plausible as I write this post tonight.
Obviously, I prefer the first scenario where as a country we come out better than we were and the new surplus can possibly be passed to me in the way of lower taxes or less “fees” somewhere else. Though, it isn’t in the least bit probable. The more likely outcome is either #2 or #3 where countries up the ante and I just end up paying more than I was before while the country remains mostly as is was.
In either scenario, my portfolio has taken a huge step down, a protracted bear market is vastly more probable, and I’m paying more across the board. Not really the win I was hoping for.
So to close, and I’ll leave it at this, “I really hope Trump knows what he’s doing”.
Until the next post.
God bless,
Jeff
