After an explosive 2017 (+19.4%) and first month of 2018 (+5.6%), the Easter Bunny came out and laid an egg last month (-2.7%). It is normal for financial markets to take a breather, especially after an Energizer Bunny bull market, which is now expanding into its 10th year of cumulative gains (up +296% since the lows of March 2009). Investors, like rabbits, can be skittish when frightened by uncertainty or unexpected events, and over the last two months, that's exactly what we have seen.
Fears of Tariffs/Trade War: On March 8th, President Trump officially announced his 25% tariffs on steel and 10% on aluminum. The backlash was swift, not only in Washington but also from international trading partners. In response, Trump and his economic team attempted to diffuse the situation by providing temporary tariff exemptions to allied trading partners, including Canada, Mexico, the European Union, and Australia. Adding fuel to the fire, Trump subsequently announced another $50-$60 billion in tariffs placed on Chinese imports. To place these numbers in context, let's first understand that the trade value of steel (roughly $300 billion – see chart below), aluminum, and $60 billion in Chinese products represent a small fraction of our country's $19 trillion economy (Gross Domestic Product). Nevertheless, financial markets sold off swiftly this month in unison with these announcements. The sell-off did not necessarily occur because of the narrow scope of these specific announcements, but rather out of fear that this trade skirmish may result in large retaliatory tariffs on imports Americans purchase, and ultimately these actions could blow up into a full-out trade war and trigger a spate of inflation.
Source: Bloomberg
These trade concerns are valid, but at this point, I am not buying the conspiracy theories quite yet. President Trump has been known to use fiery rhetoric in the past, whether talking about building “The Wall” or threats to defense contractors regarding the pricing of a legacy Air Force One contract. Often, the heated language is solely used as a first foray into more favorable negotiations. President Trump's tough tariff talk is likely another example of this strategy.
