Financial markets 2019: Tariffs, earnings and interest rates.

• Author: Brewer, Ryan M.

At the time of this writing, the stock market has just experienced one of the worst months in recent history. The S&P 500 fell 8 percent in October. Yet earnings are up in every sector and are projected to grow in 2019. Revenue is up and forecasted to be stronger. Businesses are investing more than ever. The private sector is one of the factors driving the GDP growth that politicians are bragging about. The market started the year worth $27.9 trillion and quickly added 6 percent in January. Then it fell 10 percent to a low in April, rose to a high of $30.3 trillion in September, and then lost $3.5 trillion in October. So the stock market spent the year gaining and losing $3 trillion. This is clearly due to two factors.

First, the White House decided to increase tariffs on goods with many of our trading partners. The increase is a small percentage of GDP. Furthermore, 37 percent of the revenue for firms in the S&P 500 comes from sales outside the United States. Yet the markets clearly believe the effect of tariffs will be large. The White House--which has been enabled by Congress--is persistent in challenging our trading partners and seeing a trade deficit with a country as them "taking advantage of us."

A new round of taxes against goods from China (yes, "tariffs" are taxes) could occur as early as December and target the rest of the imports from China--about $257 billion worth. On October 29, the Dow Jones Industrial Average fell more than 100 points following the trade news, erasing a 350-point gain earlier in the session after a Bloomberg report surfaced, exposing a new round of tariffs. But on November 1, the Dow went up 200 points when the White House reported that talks with China are "going well."

Second, interest rates have responded to the strong economic growth and the large and growing federal deficits. The demand for money has pushed rates higher. The 10-year Treasury rate is 3.15 percent versus 2.4 percent a year ago. Corporate bond rates are 7-8 percent, up from 5-6 percent a year ago. Unhelpfully, on September 26, the Federal Reserve raised their benchmark federal funds rate by another quarter of a percentage point, lifting it to a range of 2 to 2.25 percent. This is the third increase of the year and the Fed's economic forecasts, along with the talk about a "neutral rate," are signs that the end of the committee's rate-raising campaign is nowhere in sight. Other interest rates have followed the federal funds rate. (Contrary to the assertions in the press, the...