The Major Indexes Rebound
The stock market started to look past the trade war fears on Friday as the S&P 500 was up 0.51% and the Nasdaq was up 1.08%. The Russell 2000 was up 1.71% because smaller firms, who don’t do much international business, could be helped by protectionism. Overall, it will hurt trade and make consumer prices go up. The competition for small firms declines, but their end user is hurt. The Dow was down 0.29% mostly because of the decline in McDonald’s (4.8%), Caterpillar (2.6%), and Boeing (1.4%). Caterpillar and Boeing were down because of the tariffs, while McDonald’s had its worst day since October 2008 because of disappointing sales from the new value menu. I’d like to correct a point I made earlier. I had said GM will be hurt by the steel and aluminum tariffs. While that’s true, the selloff may have been too harsh because GM gets 90% of its steel from American suppliers. Therefore, the 4.88% decline in the stock in the past two days may have been overkill.
Trade War Talks Ratchet Up
The big news was President Trump’s statement in which he said “when a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.” That’s a scary sign because no one wins a trade war. Regardless of the outcome, while it’s ongoing, trade suffers and prices increase. It’s possible that the market sees the negative response from the Republican Congress and economic advisor Gary Cohn and concludes this tariff won’t get done.
The Congress has the final Constitutional authority on tariffs if it chooses to act. It can threaten to shut down the tariffs, making Trump change his mind. For some context, in 2002 when George W. Bush imposed a 30% steel tariff, exempting Canada and Mexico due to NAFTA, the WTO ruled a year later that the tariffs violated the U.S. obligations under WTO and fined America $2 billion. This caused America to rescind the tariffs.