Trade Wars Between the U.S. and China Could Send Indices into Bear Market
Over the past few months, the stock market has been volatile, to say the least. Don’t be shocked if the losses mount higher in the coming months. To make a bold statement, we could be entering a bear market in 2018.
It’s important to understand the source of volatility and why we could be entering a bear market in 2018…
It all started with President Donald Trump claiming that America was not being respected in the world. Since a lot of countries around the world sell to the United States, his idea was to place to tariffs on some goods imported to the country. The intention was to teach the world to treat the U.S. with respect, and China was certainly highlighted clearly in all this.
Trump’s vision is that imposing tariffs will make America a strong country.
Well, that didn’t really go as planned.
The Chinese authorities have retaliated, and they are threatening to place tariffs on American goods. China is threatening tariffs on American-made cars, planes, and agriculture products worth roughly $50.0 billion. (Source; “China Tariffs Threaten U.S. Cars, Planes and Soy in Response to Trump,” The Wall Street Journal, April 4, 2018.)
What’s the big deal? You see, the U.S. and China are the biggest nations in the global economy. If they enter a trade war, this could have consequences across the board.
This is exactly what’s spooking investors and why they are selling.
American companies have an immense presence in China. For example, Ford Motor Company (NYSE:F), General Motors Company (NYSE:GM), and Tesla Inc (NASDAQ:TSLA) sell their cars in China. Boeing Co (NYSE:BA) sells planes to China.
Let’s just say that the list of companies doing business in China is too big to mention here.
If China and the U.S. get into a full-on trade war, it could cause a lot of damage to corporate America. Their sales and profitability could be on the line. Obviously, their stock prices will also be hit hard by investors.
Why Will a Trade War Cause Stocks to Tumble Into a Bear Market?
Now the question is: “How is this going to send the stock market into a bear market?”
Understand that a bear market is when the stock market falls 20% or more from its peak in a short period of time.
Dear reader, the Dow Jones Industrial Average traded as high as 26,616 on January 26. At the time of this writing, it stood at 23,932. Doing simple math, this represents a decline of 10.08%.
We are halfway to a bear market already on the Dow! Mind you, the index made a low of 23,344 on April 2.
Will the selling continue? I believe it’s certainly possible.
My reasoning is very simple: for the selling to stop, you need some sort of levelheaded talks. We are not seeing that happen.
Just recently, President Trump said in an interview that “We may take a hit, and you know, ultimately we’re going to be much stronger for it, but it’s something we have got to do.” (Source: “Trump admits tariffs could cause ‘pain’ in markets,” NBC News, April 6, 2018.)
This is not how you calm the markets.
If the trade war rhetoric continues, investors will continue to sell, and this is why we could be hearing about a bear market sooner rather than later.