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Tariffs Are Not the Problem, Investor Sentiment Is

Tariffs Are Not the Problem, Investor Sentiment Is

Sometimes, everyone is wrong.

Well, almost everyone.

This situation often develops in financial markets. A sign that almost everyone is wrong is that most analysts agree on the cause of a problem.

One example is the popular belief that tariffs are contributing to the stock market’s decline.

The truth is tariffs are low. They’re so low that planned increases will have little impact on the economy. The chart below shows this. Tariffs as a percent of all imports are near a 200-year low.

(Source: U. S. International Trade Commission)

 

Proposed changes restore rates to levels seen in the 1960s. Rates will still be low by historic standards.

So, the problem isn’t really tariff rates. The problem is how investors think about tariff rates. Right now, many think tariffs are not good. They think tariffs are leading to weakness in the stock market.

How investors feel about news is the primary driver of price changes. When investors feel good about the future, tariffs aren’t important. But in times when investors are worried, tariffs push prices lower.

That’s the real problem. Investors are worried.

That means anything can push prices down.

Sentiment Matters

The truth is that sentiment is always more important than fundamentals. It’s just not widely recognized.

When investors are confident, for example, they believe higher oil prices show economic strength. When investors are worried, they believe higher oil prices slow the economy.

In both examples, the fundamental fact is the same. It’s that oil prices are up. The difference is how investors feel about the fact.

Now, stock prices are falling. Analysts will blame the decline on anything in the news. But the news isn’t causing the decline.

Stocks are falling because investors are worried about the next few months. Economic growth is slowing. Earnings growth is slowing. These are things to worry about. And, worrying is new for some investors.

Three years ago, investors thought slow economic growth was normal. They thought earnings grew slowly because of that. They weren’t worried. And, stock prices rose.

Now, the media is amplifying the news and worrying investors.

Worried investors sell.

Until we see optimism about the future replace pessimism, expect a bear market.

 

Regards,

Michael Carr, CMT, CFTe

Editor, Peak Velocity Trader

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