Trade tensions between the U.S. and China are quickly approaching a fever pitch.
Tariffs are being levied left and right, and negotiations have completely sputtered – grinding to a halt as each country digs in deeper to defend their positions. By now, it seems inevitable that Trump will place tariffs on all Chinese imports, as both sides refuse to back down.
Each week, either China or the U.S. does something to up the ante in an attempt to make their adversary “say uncle”, giving in to the aggressor’s demands.
All of that certainly sounds troublesome, doesn’t it?
There’s no way that an economy can prosper when its embroiled in an all-out-trade-war, right?
You’d think so, and that’s what all of the economists have been repeating ad nauseum since the tariff talks began several months ago. And while the Chinese markets (and economy) have certainly suffered, the U.S. economy is firing on all cylinders – stock market included – something that the experts have, by and large, not correctly predicted.
So, where’s all the gloom and doom, then? Where’s the big crash caused by an international trade fiasco? We’ve been waiting on it for months now, but the market just keeps chugging along, launching the DJIA and S&P 500 to all-time-highs time after time.
But why is that happening? Who in their right mind would pour their money into equities when two superpowers are approaching economic war?
I’ll tell you who:
Wall Street and American retail investors.
With their forces combined, big institutional investors on Wall Street and small-time retail investors have chosen to plant their collective heads firmly in the sand, ignoring the warning signs that economists claim are abundantly clear.
These experts say that a major correction is coming, and as much as we’ve been enjoying this legendary bull-run, I have to agree – but the cause of the next big drop is NOT going to be an escalating trade war.
Instead, it will simply be a sell-off from investors as the market finally exhausts its good will.
Simply put, any uptrend will always result in a correction, eventually. It may take some time, but it absolutely must happen to sustain further growth. We saw it happen in 2015 as the market stagnated somewhat after 6 consecutive years of fantastic growth following the housing bubble of 2008:
The S&P 500 just couldn’t help itself, eventually breaking a resistance level set back in 2007 before enduring that sell-off period in 2015, in the purple circle on the chart above. After gathering some energy, the market converted that resistance into support, using it as a trampoline to continue its rise until January of 2018, where it sold-off yet again.
In my opinion, we’re approaching a very similar situation to where we were back in that 2015 correction. The January 2018 correction was the first major sell-off since 2015, and as the S&P 500 has just broken resistance yet again, I wouldn’t be surprised if we saw yet another correction back down to that level:
After a nice, healthy sell-off, the market will be off to the races yet again as American corporations continue to hit the cover off the ball, quarter after quarter.
And sure, the trade war could be a contributor to the next big dip in prices, but from what we’ve seen so far, American investors just can’t be bothered by what the Chinese are doing. Unless something truly catastrophic happens, the trade war will simply contribute to increased volatility, NOT a major crash like many bears are calling for.