Wars hurt investors in short term, uncertainty is always bad. US is threatening one & creating the other
Two out of every three Americans are invested in the stock market, and the last thing they need is a president who plays fast and loose with it. But they’ve had one for a year, with three more to go.
It’s unlikely that Trump, who sent markets into a funk last April with his “reciprocal tariffs”, and again on Tuesday with his bullheaded manoeuvres over Greenland, will turn over a new leaf now. But he should, because none of this is working.
The tariff war was squarely aimed at China, which just ended the year with a record trillion-dollar surplus. Meanwhile, his deal with friend India is stuck, and now he’s riled old allies in Europe over what he calls a “piece of ice”.
Tuesday’s market slump resulted from a lot of uncertainty over his threats. Would he grab Greenland militarily, or would he prise it out with more tariffs? America trades far more goods with EU than China, so the 10% tariff threat was bound to be damaging.
Luckily, Trump has retreated, and markets everywhere signalled relief on Thursday, but doubts will persist. And that could mean less wealth creation for not only those millions of Americans, but also us. America’s spending habits are closely tied to the wealth effect of stocks.
When stocks shoot up, Americans feel richer and buy more cars, clothes, computers, crockery, and that’s just the letter C. Which means work for factories in China, India, Slovakia, etc, higher earnings, GDP growth, and market indices. Friendly trade is good for all. Wars, whether with boots on the ground or tariffs at ports, are good for nobody.
But as history shows, uncertainty is even worse than war for business. Markets were on a rollercoaster last summer when Trump kept revising tariffs. Buyers didn’t know how much their cargoes would cost by the time they completed the voyage from a foreign port.
In a “clear war”, say WWII, markets baulk at first (-12.3% in the first three months) and rebound (16.9% annualised returns) when the picture becomes clear. Same thing happened in Iraq in 2003 – a 30% rally over 12 months.
As pundits say, markets don’t judge wars morally. They find new ways to make money, from weapons, energy, logistics… But uncertainty has a paralysing effect.
And Trump’s second term has been a masterclass in it, fuddling friends more than foes. He should stop for the sake of his voters at least.
Disclaimer
Views expressed above are the author’s own.
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