What the bond market could be telling us about the state of the U.S. economy, in this week’s Fastest 4 Minutes in Finance.
Trump, Greenland, and Rising Geopolitical Tensions
President Trump has picked another geopolitical fight in his push to purchase Greenland from Denmark.
Market Reaction: Stocks Plunge, Then Rebound
In the first trading day after the President’s demands, the stock market plummeted. The Dow dropped 800 points, and the S&P 500 and NASDAQ fell more than 2%. Markets rebounded the next day, as the President ruled out taking Greenland by force.
It’s what happened in the bond market that should also grab our attention.
Tariffs, Trade War Threats, and Investor Anxiety
The President said Saturday that the U.S. would enact tariffs of 10% on 8 European countries if they do not cooperate with his plans for Greenland. He also threatened the tariffs would escalate in June if no deal was made. European leaders countered by threatening retaliatory tariffs on U.S. goods.
Treasury Yields Signal Economic Concern
According to Yahoo Finance, treasury yields rose to their highest levels in 4 months in the first day of trading this week. It was a clear signal that investors are selling off American debt when presented with the possibility of another trade war. It is a signal that investors are worried about the health of the U.S. economy if long-term tariffs are enacted.
Two Oxford Economics analysts told Yahoo Finance, if tariffs were to escalate as being threatened, it would lower U.S. GDP by 1%.
We’ve Been Here Before: Lessons From Past Tariff Fears
Of course, we’ve been down this path before. Last April, President Trump’s so-called “Liberation Day” when he announced a plan to enact tariffs on several countries, nearly pushed the stock market into a bear market.
Why Markets Hate Surprises
Bottom line, the markets don’t like surprises, and the President is full of them. Time will tell what the long-term plan is and whether it harms or helps the U.S. economy. But, the impact will not be immediate, even though the markets response often times is.
The Investing Lesson: Don’t React to Headlines
The investing lesson here is, we cannot react the way the overall market does. At the time of this recording, the S&P 500 and NASDAQ are back up 1% following the 2% drop. Getting out of the market when there’s bad news can result in missing the upside, and thereby damage your long-term return.
Diversification Beats Market Timing
Diversification is the best way to reduce volatility, not trying to time the market.
Securities are offered through LPL Financial, Member FINRA/SIPC. GenWealth Financial Advisors is an other business name of Independent Advisor Alliance, LLC. All investment advice is offered through Independent Advisor Alliance, LLC, a registered investment adviser. Independent Advisor Alliance, LLC is a separate entity from LPL Financial.
