August 2, 2019: Since yesterday the Dow has been getting slammed down over 500 points in one day despite recently most corporate earnings and economic reports have been released with “better than expected” results. Generally, this is not a good sign.
Fundamental traders as well as technical traders would usually call this a sign of a reversal.
Some of the decline has to do with reduced summer activity (liquidity) from the big market players. Much of the decline has to do with current uncertainty of the Fed regarding interest rates, and of most of the decline has to do with continuing threats of additional tariffs.
The market does not like uncertainty and even more the market wants to be free, that’s why it’s called a “free market economy”. But government intervention (manipulation in this case?) tariffs, even threats of tariffs never ends well for economies and definitely not for stock markets, especially since everything is now connected in a “global economy”.
The world today is inter-connected, especially the business world. Mega corporations from every country in the world have operations, personnel, resources and investments in every other major economy in the world.
A stock market sell off in Asia affects the stock markets in Europe and the US. A sell off in the US markets affects stock markets in Asia and Europe.
Tariffs against another country are a short term trigger to try to worsen economies that sometimes lead to trade wars. Trade wars are not good for stocks in this global economy.
A way to get an economy to expand is by long term incentives, investment and long term support…not by slapping tariffs on another country, but by developing more incentives for companies to invest more in the local economy.
Tariffs if implemented should be a “long term” step by step, incremental approach, as a part of a long term policy. Not an immediate threat and implementation.
Tariffing a country is similar in outcome to taxing your own population. It is never a welcome approach, but if handled appropriately it is generally accepted by the masses. For example, a state deciding to increase their sales tax from say 6% to 12% in one year is going to get a lot of negative outcomes. However, an incremental tax, a step by step increase over several years is widely accepted as a normal approach if it’s necessary to do so.
Using tariffs as an immediate economic weapon, or as a blunt instrument against a powerful economic adversary never leads to positive outcomes. And the stock market is reacting accordingly.
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