Stocks fell yesterday as losses accelerated along a wider front.

Trade worries were blamed and, this time, those fears seemed warranted after Commerce Secretary Ross said companies and governments worldwide would have to feel some pain before the benefits from better trade conditions could be achieved. The markets understand the pain part; they aren’t yet convinced of the prospective gains.

The Dow has now fallen for nine straight sessions, its worst losing streak since March 2017. If only markets behave as they did subsequent to that decline when they went up for almost 10 months straight. In about four weeks we will enter earnings season. Everyone is optimistic about second quarter results. They should be as good as it gets. But analysts will also be focusing on managements forward looking statements. While most will acknowledge that current trends are strong, they are also likely to express a higher than normal level of uncertainty related to trade volumes and input costs. While the Trump administration has laid out a program to subject hundreds of billions of dollars of goods to tariffs, so far few have been implemented. However, we are just beginning to see the scope of retaliatory tariffs. Today, countries from Turkey to India laid out plans to impose tariffs on American goods.

Tariffs and taxes both start with the same letter and, for all intensive purposes, they are both forms of taxes. While we all can acknowledge unfair trade practices around the world, a trade war where everyone simply taxes whatever is imported serves no one any good. While no one is talking of universal tariffs by any stretch, and Trump almost always overstates his own case, the odds are increasing that some level of higher tariffs are likely over the next several months although the market still seems to believe the odds are less than 50:50.

To date, Republicans have given Mr. Trump a free ride and rarely contradicted him. They universally supported his tax cuts and the 2018 spending bills. They have been mum on tariffs to date. Yes, some have squabbled verbally but no one in Congress has stepped forward and tried to stop or alter pending tariffs even though the Constitution grants Congress the authority to control tariff policy. Even on immigration, despite the disturbing images of children being separated from parents, Republicans have generally stood by and let the President take executive action to defuse the problem. Today, the House will vote on a compromise bill without any Democratic support that may offer a more enduring path for asylum seekers while funding the wall Mr. Trump wants. But that bill is almost certain to die in the Senate largely due to Democratic opposition. Thus, whether it be trade, immigration or almost any other issue, it is Trump’s call and he is likely to gather near universal support from within his party. That may not be enough in the Senate where 60 votes are needed most of the time but Trump will seek to cast the blame on Democrats for any votes that don’t go his way. Voters will get a chance to voice their own opinions in October. So far, except for the tariff issues, the economic consequences of recent front page headlines have been minimal and the economy remains on a steady upward course. In the end, that is what is most important, especially with earnings rising and inflation tame. A true trade war would clearly change that but, despite the glaring headlines, it is far too early to presume a trade war. There remains lots of time between now and the implementation of meaningful tariffs. However, that doesn’t mean fear isn’t evident. You can see it in the dismal recent performance of multinational manufacturing companies, the auto sector, and even the banks. 2

Two other issues were at the forefront overnight. The Federal Reserve cleared 35 major banks to put forth their programs for future dividends and stock repurchases. That was no surprise. The dividend actions and stock repurchase programs will be unveiled next week and it could be a very nice week for bank stocks. Deregulation has made the job of a banker easier but the Fed is still playing the role of strident overseer. Banks this year were most likely tempted to be a bit more aggressive with their programs to reward shareholders. We will see next week whether the Fed endorsed them all.

The other key event today is going to be an OPEC vote to increase production quotas in part to offset big production decreases in Venezuela, Iran and Libya. The consensus at the moment suggests an increase of about 1 million barrels per day. That seems reasonable considering demand growth and the aforementioned loss of production. Oil prices were marginally lower yesterday but could move today if the quota increase drifts far from 1 million barrels per day.

Otherwise, the economy chugs along, interest rates and inflation are fairly benign, markets can generally ignore politics with the obvious exception of tariffs, and there are no obvious storm clouds on the horizon beyond the tariff issue. Within equity markets, there has been an obvious momentum inspired chase toward the few dozen stocks that have been market leaders to date. As the prices rise, analysts raise forecasts. While there may be a bit of an exaggeration in that statement, my point is that rising stock prices force rising expectations. At some point, the most grandiose expectations become unattainable. When is that point reached? I have no idea. But it will happen. Could any of these market leaders double or triple before then? Anything is possible. But when everyone gets on the same bandwagon, the likelihood of a correction sooner than later increases. Whether they exceed expectation sufficiently to continue the rally remains to be seen. But the recent rally in all these names raises the bar. Don’t be surprised if great news is rewarded with a muted response. A safer near term bet may be among the many quality companies left behind.

Today, Carson Daly is 45. Meryl Streep turns 69.

James M. Meyer, CFA 610-260-2220

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