Stock markets are not always ‘right,’ but it is still worth paying attention to them.
The markets still don’t appear to be as appreciative as they should be of the zombie McKinleyism that appears to have been adopted by this administration as its trade policy.
The Wall Street Journal:
The Dow industrials dropped after President Trump said he would ramp up tariffs on steel and aluminum from Canada to 50%.
Shares of industrial and real estate firms were among the biggest decliners in the S&P 500. Tech recovered some ground later in the session, and was recently the only one of the broad index’s sectors trading higher.
Shares of industrial companies among the biggest decliners?
That might suggest some skepticism that the current policies are a win-win for our manufacturers.
Of course, market moves — certainly day-to-day movements — should be treated with some skepticism, but there cannot be much serious argument that the current market weakness is looking like more than a brief spasm.
Stock markets are not always “right,” but it is still worth paying attention to them both as a real-time judgment of what is going on and a collective wager on what might be coming next.
Why’s that?
Rand Paul tweeted yesterday:
The stock market is comprised of millions of people who are simultaneously trading. The market indexes are a distillation of sentiment. When the markets tumble like this in response to tariffs, it pays to listen.
And one reason it pays to listen is that stock prices are, well, prices. They are being paid with real money. Decisions to buy, sell, hold, or avoid a share or shares are decisions backed by real money with real economic consequences for the person taking them. They are more than a pundit’s guess. A price is what something is worth to a real buyer or a real seller at the moment of a transaction. In that respect, a share price is no different than the price of any other “good.”
The factors that weigh on a price will vary from good to good, and in the case of a stock there is a huge number of factors that influence the level at which it is traded. The idea that share prices are driven solely by, say, expectations of a company’s future cash flows is, as most people know, nonsense.
The stock market is far from infallible, but if enough people feel, for whatever the reason, that they want to sell enough stocks to drive indices down, that can be a warning sign of trouble ahead.
There’s a good reason why stock market performance is used as one leading indicator of where an economy is going. And if it’s possible to isolate something — trade policy, say — as an important cause of a market’s fall, that’s a warning sign about how that policy is likely to work out.
This does not mean that all tariffs are necessarily bad, or that it is wrong to use them as a negotiating tool, but it is, again, a warning of how this particular set of tariff hikes (or some of them, or even one of them) could do serious damage to the economy.