What was the effect of the tariff on the stock market? Between 1888 when Harrison was elected and 1890 when the McKinley Tariff was passed, the Dow Jones Average was in a bull market. In fact, the pattern of the DJA in 1889 looks similar to the pattern the stock market followed in 2016. Once it was evident that the Tariff Act of 1890 would pass and was loaded down with 450 amendments, the stock market began to tank, falling from its peak of 99.14 on May 17, 1890 to a low of 76.77 on December 8, 1890.   The tariff was not popular, in part because it led to higher prices for many consumer goods. The Republicans lost control of Congress in 1890 and Grover Cleveland defeated Benjamin Harrison in 1892. Cleveland reversed Harrison’s policies. In 1894, the Wilson-Gorman Tariff Act was passed, which lowered tariffs in the United States, undoing the McKinley Tariff of 1890. Donald Trump should learn the lessons of history and avoid the temptation to raise tariffs as President Harrison did. Otherwise, we all will pay the price.

Signed into law on June 17, 1930, the Smoot–Hawley Tariff was sponsored by Senator Reed Smoot and Representative Willis C. Hawley and effectively raised tariffs on over 20,000 imported goods. The goal was to reverse early stages of the global economic contraction that started at the end of 1929. Congress sought to protect American workers, and particularly farmers, from foreign competition as a result of the rapid expansion of technology infiltrating the workforce. Cars, trucks, and tractors replaced horses and mules, and farmers saw a major decrease in the demand of their agricultural products, contributing to a surplus in farm produce. While demand fell, and supply increased, combined with foreign farmers saturating the US market, America suffered a period of over-production mixed with under consumption, culminating in a massive trade deficit. The snowball effect of the Smoot–Hawley Tariff was felt globally. US imports decreased by 66% from $4.4 billion (1929) to $1.5 billion (1933). Because foreign countries weren’t selling many products to the US, they responded by importing less from the US. Subsequently, American exports decreased 61% from $5.4 billion to $2.1 billion. Overall, world trade decreased by over 60% between 1929 and 1934. The graph below shows the decrease in US Nominal GDP from 1929 to 1934.

Global Financial Data has recently introduced commodity indices that provide data on over 1000 years of commodity prices. It is only as a result of these indices that we can see the anomalous behavior of energy prices over the past forty years and wonder how long or whether this trend will continue.  

Energy Resources During the Past 750 Years

From the 1200s to the 1800s, the economy’s primary energy resource was firewood, with coal and lamp oil acting as secondary resources. Each, in its own way, provided different types of energy for cooking, heating and power. GFD’s data on firewood prices begins in 1252, coal prices begin in 1447, and lamp oil price data begins in 1272. Although firewood was the primary source for energy from the 1200s to the 1800s, it was gradually replaced by electricity and gas in the 1800s as energy was brought directly into the home. As the graph below shows, although there were periods when the price of firewood rose dramatically, the price of firewood also stayed the same for centuries. As the graph of whale oil prices below shows, the impact of war on energy prices is nothing new. The primary spikes in whale oil prices in the 1800s occurred during the War of 1812 and the Civil War.   The logarithmic chart below compares the behavior of energy prices to agricultural and industrial commodity prices over the past 750 years. Between the three, energy prices have increased the most, rising over 500-fold in the past 750 years, while industrial commodities have increased in price the least. A quick study of the chart shows that there were long periods of hundreds of years when the price of energy hardly changed, in particular, between 1350 and 1550 and again between 1700 and 1900. However, the 1900s and the 2000s have proven to be a period of wild, but generally rising changes in the price of energy and other commodities. The price of energy really began to diverge from agricultural prices around 1860 when petroleum oil was discovered in Pennsylvania. Energy prices have leapt ahead of agricultural prices during the past 50 years, especially as a result of large price increases in the 1970s and 2000s. Since 1970, commodity prices have followed dramatically different paths. Between 1970 and 2016, the agricultural index increased almost four-fold, the industrial index ten-fold and the energy index thirty-fold! It is only with this chart that we realize the anomalous behavior in commodity prices that has occurred over the past 40 years and broke a 700-year trend of fairly equal increases in energy and agricultural commodity prices. Another interesting revelation of the chart is the periodic spikes in commodity prices that occur. Such spikes were rare before the industrial revolution, but now seem to come with some degree of regularity. The first three spikes occurred during wars, in the 1810s during the Napoleonic Wars and War of 1812, in the 1860s during the American Civil War, and in the 1910s during World War I. The first two spikes were followed by forty-year price decreases as a reversion to the mean in prices during times of peace. The price increase during World War I saw a similar decline in prices follow in the 1920s and 1930s in agricultural and industrial commodities, but not in energy prices. On the other hand, while agricultural and industrial commodity prices showed sharp increases during World War II, no similar increase in energy prices occurred during the war. The two most recent spikes in energy prices in the 1970s and in the 2000s have yet to be followed by reversions to the mean. While supply factors, primarily scarcity, drove the spike in energy prices in the 1970s, higher demand from China and other countries drove the spike in prices during the 2000s. Since the 1970s, both energy and industrial commodities have followed similar price patterns while agricultural price increases have been more steady.  

The Surprising Interplay Between Coal and Oil Prices

The chart below provides a comparison of the behavior of two of the underlying components of the energy price index, oil, represented by the lower price line since 1800 and coal, which has shown a steady uptrend over the past few centuries. Were one to simply rely upon the persistence of current trends into the future, there would be two logical conclusions. First, energy and industrial commodity prices will continue to increase at a faster rate than agricultural prices. Second, oil prices will continue to rise at a faster rate than coal prices. The reality of supply and demand appear to reinforce these trends. Declining population combined with improving technology means that food is unlikely to become scarce causing large price increases. As people become richer, they switch from low-resource grains to high-resource livestock, but there is little reason to believe that this change in the composition of food consumption will cause dramatic overall increases in agricultural prices. With respect to energy, future changes in demand will be driven more by economic growth than by population increases. In developed countries, energy input per unit of production is declining and to some degree, this offsets the increased demand for energy in emerging markets. Countries like China, which rely heavily on oil imports, are reducing their energy dependence through the development of solar power and improved storage for batteries. Services play an increasing role in both developed and emerging markets, and as services increase their share of GDP, the relative dependence of the economy on petroleum and coal will decline. Future supply and demand for energy depend upon technology and how quickly solar and battery technology are able to improve, as well as how much fracking and related technologies are able to increase the amount of oil that can be retrieved from the ground. Because of the impact of carbon-based energy on global warming, the world is attempting to reduce its reliance on coal and oil. Long-term global trends in population, the composition of the work force, technology, the impact of carbon-based resources on the environment, slower overall economic growth and other factors favor reduced reliance on commodities in the future. Since the economy has passed through its most recent 30-year spike in commodity prices in the 2000s (previous spikes were in the 1910s, 1940s and 1970s), commodity prices are likely to decline at least until the 2020s. Whether commodity prices spike again in the 2030s will depend upon global economic conditions twenty years in the future. The analysis of long-term trends in commodity prices is enlightening. The fears of the 1970s that the world would soon be facing a resource-scarce planet which was running short of energy, food and other commodities never occurred. If anything, the expectation should be for increased supplies of resources and declining commodity prices for the next twenty years. Higher demand for commodities will depend primarily upon how quickly emerging markets increase their GDP while technological improvements both increase the supply of energy and provide substitutes through solar power, material composites and other technological improvements. A review of the 750-year chart of commodity prices shows that for most of history, commodity prices stayed the same for periods of several centuries. It was mainly in the 1500s and the 1900s that the world experienced irreversible increases in commodity prices. Could this pattern repeat itself in the twenty-first century? Right now, this seems unlikely. The pattern over the past 100 years has shown no sign of reversing itself. For now, the safest bet is for rising commodity prices, and especially for rising energy prices. But then, safe bets are not always safe.

By our count, 37 countries hit what could be bear market bottoms in 2016. We excluded eight countries (Ghana, Cyprus, Kenya, Malawi, Portugal, Tanzania, Uganda and Zambia) because these countries failed to rally at least 10% from their market bottom, and so, their bear market could continue into 2017. The Cyprus stock market, for example, has declined 99.45% from its all-time high in November 1999. If you had put a $1000 in the Cyprus stock market in 1999, now you would barely have enough left for a cup of coffee at Starbucks. We also excluded Canada from this list. Even though Canada ended a 24.36% bear market in January and has rallied 29% since then, the Canadian market had only risen 40% from its previous bear market bottom in October 2011. We calculated both the percentage increase in the previous bull market and the decrease in the bear market that ended in 2016. For the 37 countries in our list, the previous bull market had risen by 141% with Mongolia ending the strongest bull run with a 626% increase. The bear markets that ended in 2016 had an average decline of 41%, but since then, most of the markets have shown significant recoveries. By the end of 2016, the average stock market in our list had risen by 31% from its market bottom. Several countries ended bear markets that had lasted over five years (Brazil, Colombia, the Czech Republic, Kuwait, Mongolia, and Oman).   Of the 37 countries that probably hit a bear market bottom in 2016, one-third of them were in Europe. Interestingly, even though most European countries hit their market bottoms in January or February, the MSCI Europe Index hit its bottom on June 27, 2016 after the United Kingdom voted in favor of Brexit. Two other international indices hit bottoms in 2016. The MSCI EAFE Index declined by 25% between July 2014 and February 2016 while the MSCI Emerging Market Index declined by 43% between May 2011 and January 2016. Both of them now appear to have hit a bottom and are moving up again. The MSCI World Index did not suffer a 20% bear market decline primarily because of the strength of the United States stock market. Although a bear would argue that there is no reason why the bear markets these countries endured could not continue and each market hit a lower low in 2017, given the fact that on average the markets have bounced off their bear market bottom by 30%, it seems unlikely that they are all headed for lower lows in 2017. Although some bears may argue that a country like the United States has been in a bull market for almost eight years, which is longer than the historical average, there is no reason why the bull market in the United States cannot continue. The fact that numerous countries hit market bottoms in 2016 at least provides support for a continuance of the current bull market into 2017 and reduces the likelihood that markets are headed for a major top in 2017. The table below provides information on the 37 countries and three international indices that hit bear market bottoms in 2016. The table provides information on the previous market top, when it ended and the size of that bull market; when the bear market decline ended and the amount of the decline; and how much the market has recovered since then. Individual stock markets are measured in local currency while international indices and Venezuela are measured in US Dollars.  

Country	Bull Top	Change	Bear Bottom	Change	2016 Recovery
Abu Dhabi	9/18/2014	144.93	1/21/2016	-28.59	21.66
Belgium	4/13/2015	104.31	2/11/2016	-21.25	16.30
Brazil	11/4/2010	133.58	1/20/2016	-48.43	59.99
China	6/12/2015	165.15	2/29/2016	-48.02	15.53
Colombia	11/5/2010	151.96	1/18/2016	-51.78	28.75
Croatia	2/11/2011	84.84	1/18/2016	-32.55	26.54
Czech Republic	4/15/2010	107.51	6/27/2016	-39.42	16.65
Egypt	9/7/2014	147.67	1/21/2016	-48.26	147.74
France	4/27/2015	92.87	2/11/2016	-25.28	24.47
Germany	4/10/2015	120.19	2/11/2016	-29.00	26.40
Greece	3/1/2014	187.51	2/11/2016	-67.81	45.99
Hong Kong	4/28/2015	75.03	2/12/2016	-35.59	20.09
India	1/29/2015	95.60	2/11/2016	-22.67	16.01
Iraq	10/4/2011	63.50	6/16/2016	-73.18	28.75
Italy	4/15/2015	91.29	6/27/2016	-30.74	22.61
Japan	8/10/2015	143.17	2/12/2016	-29.27	26.91
Kazakhstan	9/3/2014	55.26	1/21/2016	-39.12	69.89
Kuwait	6/24/2008	70.82	1/26/2016	-68.47	16.46
Luxembourg	4/14/2015	73.02	2/11/2016	-34.48	41.39
Mongolia	2/25/2011	626.20	5/5/2016	-68.18	17.09
Namibia	5/5/2015	199.62	1/20/2016	-36.31	38.52
Netherlands	4/13/2015	85.92	2/11/2016	-24.28	24.42
Nigeria	7/9/2014	118.19	1/19/2016	-47.82	19.68
Norway	4/15/2015	72.83	1/20/2016	-26.35	29.50
Oman	1/16/2011	66.38	1/21/2016	-30.74	18.81
Peru	4/2/2012	298.29	1/20/2016	-63.09	75.34
Philippines	4/10/2015	376.85	1/21/2016	-25.14	12.43
Poland	4/28/2011	120.89	1/20/2016	-42.90	16.32
Qatar	9/18/2014	239.24	1/18/2016	-40.65	22.54
Romania	8/10/2015	83.09	1/18/2016	-21.21	17.71
Saudi Arabia	9/9/2014	169.96	10/3/2016	-51.42	33.12
Singapore	5/22/2013	143.72	1/21/2016	-26.50	12.75
Spain	4/13/2015	99.78	2/11/2016	-34.95	20.49
Sweden	4/27/2015	109.56	2/11/2016	-22.84	22.79
Ukraine	8/1/2014	65.89	5/24/2016	-54.63	23.17
Venezuela	6/13/2015	100.40	12/10/2016	-73.34	14.07
Zimbabwe	8/1/2013	133.18	6/17/2016	-59.95	54.76
MSCI EAFE	7/3/2014	52.30	2/12/2016	-25.21	12.84
MSCI Emerging	5/2/2011	153.96	1/21/2016	-42.93	5.24
MSCI Europe	5/21/2015	53.45	6/27/2016	-25.53	12.89