I see two problems with the term “correction”. Yes, there is a sense in which any change in market prices is a “correction”, as with new information the previous price becomes inappropriate. But that’s equally true of an increase or a decrease in market prices. In contrast, the term market correction tends to be used asymmetrically, for price declines but not price increases.
The second problem is that market corrections are often viewed as a healthy change, like correcting a mistake that you made on an exam. In fact, the vast majority of stock market declines reflect unfavorable developments. Only in rare cases where price declines reflect events that are good for the country but bad for business can we say that a stock market decline is a sign of health. And stock price declines that are due to trade wars are certainly not in that category. Here’s Bloomberg:
Treasury Secretary Scott Bessent, a former hedge fund manager, said he’s not worried about the recent downturn that’s wiped trillions of dollars from the equities market as the US seeks to reshape its economic policies.
“I’ve been in the investment business for 35 years, and I can tell you that corrections are healthy, they are normal,” Bessent said Sunday on NBC’s Meet The Press. “I‘m not worried about the markets. Over the long term, if we put good tax policy in place, deregulation and energy security, the markets will do great.”
Market prices tend to roughly follow a random walk. That means a decline in the current price of stocks also represents a decline in the future expected value of stocks. The stock market is forward looking, and already incorporates any expected futures gains from trade wars. If we are not now seeing those gains reflected in the stock market it is probably because they do not exist.
Back in 1930, President Hoover agonized over whether to sign the Smoot-Hawley tariff bill. On a Sunday in late June, he decided to sign the bill, despite receiving a letter signed by over 1000 economists opposing the tariffs. The next day, the US stock market suffered its largest one-day decline of 1930. Those waiting for a rebound in the market–the Scott Bessents of 1930–had a long wait. Stocks didn’t regain June 1930 levels until mid-1955, a quarter century later.
To be clear, I’m not making any predictions about the market, as President Trump has a habit of advocating trade wars and then backing away at the last minute. In addition, many other factors beyond tariffs affect the stock market. I still own stocks and it wouldn’t surprise me if they bounced back. Nonetheless, it is dangerous to assume that your policies are beneficial in the long run, when the markets suggest exactly the opposite.
Update: It seems the markets agree with me:
U.S. stock futures declined Sunday after Treasury Secretary Scott Bessent said he’s not worried about a market downturn, despite a miserable stretch for Wall Street.
