With the most recent escalation of the trade war, the escalation that broke the strong, bullish trend in the indexes in early August, it’s particularly concerning to Americans.
Why?
Until now, the tariffs have primarily impacted steel, and therefore companies like John Deere, Caterpillar and Boeing, that rely on steel from China. These companies have to now pay more for the components they use to make the products they sell, i.e. airplanes, construction equipment, tractors. With tariffs like this, that are basically directed towards a material and the companies themselves eating the cost, you can see the results in their corporate earnings reports and their stock prices.
Boeing has had the additional issue of the airplane crashes, and grounding of the 737 Max.
But, look at John Deere and Caterpillar. Previously, these were two of the strongest companies, in one of the strongest sectors in the S&P 500 – the industrial sector. However, that all changed with the trade war.
Caterpillar Inc (CAT) – Daily Chart
This is because stock prices are partly based on corporate earnings. Corporations report earnings quarterly, and guess what – when the earnings aren’t great, and the forward guidance isn’t great, the stock price falls! Investors want to invest in companies that are doing well, and making money.
The trade war has impacted the industrial sector because of the tariffs on steel. Can you imagine if this same impact hits retail companies, such as Target, Walmart, Home Depot, Amazon, and more?
The strength of the economy is largely based on Americans making money, feeling safe with their money and doing things like investing in businesses and the stock market (instead of hoarding it under a mattress), and spending it. If American consumers are feeling under stress, they don’t buy extra goods. Then, companies don’t make as much money. When companies don’t make as much money, this slows economic growth. When they don’t make as much money, they have to take actions like cut jobs, or wages. This then slows growth even further.
Therefore, the moral of this entire story is that increased prices on consumer goods, think, everything you get from Target or Costco, would not be a good thing for the average American in the near-term.
Can you imagine if Americans had prices increased on most retail goods they buy (because most goods come from China!)
I discuss this on Neil Cavuto’s, Your World, on August 8th, 2019 below:
Your World – August 8th, 2019
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