The stock market had been hoping for an interest rate cut by the Federal Reserve. It had priced in a half-point drop in hopes that it would continue. About 10 years had passed since the Fed had last lowered rates and the stock market knew every time interest rates have been reduced, the market went up.
At its meeting, the Fed cut rates by a quarter of a percentage point, and the chairman indicated it was not certain that there would be any additional cuts. The result was the market went wild.
All of this has been caused by the trade war we are engaged in with China. The two largest economies in the world have collided. China has been unfair in its dealing with the United States for decades. China limits its markets to our manufacturers, steals our patents and subsidizes its exports to unfairly compete.
The situation is very complex. What might benefit some Americans, such as lower prices on some goods, might hurt others (such as some manufacturing workers) since it is harder for our companies to compete. Some countries have advantages over others because of natural resources or the stage of development in their economies.
The earliest men were gatherers. They wondered around, finding things that were available in the environment to eat and survive. As they advanced their skill level, they became farmers and hunters, so they could have a more predictable food supply than what was just lying around.
At first, man had to produce everything a family needed. As society progressed, people began to specialize by entering trades, such as shoemaking, and trading their products for food and other needs. This allowed people to work in factories and use their wages to buy things their families needed.
This is important to remember because some parts of the world are always going to have an advantage competing with another area because they have natural resources, cheaper power or a lower cost-of-living, which means wages are probably lower. Free trade, if universally applied, finds the best source of goods. Unfortunately, governments apply barriers to this natural order.
President Donald Trump is applying tariffs to try to make trade fairer with China. Whether it will work has yet to be determined. China will not just surrender or sit back and do nothing. China has said it will no longer import any of our agricultural products. This hurts our farmers because China is the fourth-largest purchaser in the world.
China also could allow the value of its currency to change, which could have a major impact on the cost of imports and exports.
China could apply tariffs on goods it buys from us or stop buying our government debt, which would drive up our interest rates. China could start selling our debt, which it already owns, to disrupt those markets. No one knows exactly what will happen or how long it could go on.
Many of these things can affect the stock market’s performance. Do not assume this will resolve itself quickly or that everything is normal. As always, do not get greedy and make sure your investments match your timeline and risk tolerance. These are not normal times.
Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”
To submit columns on financial planning or investing, email Rick Shrum at firstname.lastname@example.org.