After months of trade threats by both the US and China, the threats came to fruition last week. How will the markets respond?
There is expected to be an overall rise in consumer costs as producer costs will rise with tariffs. This makes inflation a concern in the near term. With inflation often comes reduced demand for goods, which will lead to a slow down in GDP. The logical assumption would be that markets would respond with a pullback to the implementation of tariffs.
Equity markets may well look past the tariff environment and focus on the strength of the second quarter. Economic indicators have all pointed towards a strong second quarter and therefore strong earnings. Tariffs, as they are constituted today, will likely end up reducing GDP for the US by 0.1%. There is definitely a case for markets to focus on the here and now rather than the potential loss of a tenth of a percent in GDP.
Friday markets made their choice. As US tariffs and China counter tariffs went into effect at 12:01 AM. Markets opened heading north and never looked back. Apparently, the short-term optimism associated with second quarter earnings has taken precedence over the long-term risks presented by tariffs.
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