The stock market simply does not like uncertainty, and the current trade spat with China is creating extra layers of uncertainty regarding the global economy. U.S. stocks finished down well over 2% this afternoon and have fallen about 5% in the past week. Despite this recent blip, the S&P 500 Index is still up around 12% year-to-date.
Economists generally consider a trade war a losing proposition for both sides. To no one’s surprise, China quickly retaliated with tariffs in response to U.S. tariffs, and the tit-for-tat spiral continues.
The first wave of tariffs on imports from China was (intentionally) less apparent to consumers, targeting capital goods and inputs in the production process for U.S. businesses. Additional tariffs, if implemented, will be more obvious and painful to American households (think in terms of price increases for clothing, toys and electronics). Retaliatory tariffs announced by China have hurt stocks of U.S. technology and machinery companies today, as products would become more expensive to sell in China and/or more expensive to manufacture due to higher supply costs.
How and when this trade tiff will end is difficult to say, but some have questioned whether the new tariffs will stay in place very long. Pain will be felt by both countries if the posturing continues, and any political support is likely to fade as U.S. households begin to feel the impact. Economists at Scotiabank put it this way: “A 25% increase in the prices of smartphones, tablets and computers heading into the 2020 vote has never struck us as a winning electoral strategy.”
One potential outcome (shared by Scotiabank) is an eventual deal being reached that is touted as a win by both sides. This would not be too surprising to many, and the stock market would likely react positively to having the trade cloud disappear.
The takeaway from this trade feud remains the same as every other market scare: the future is fickle and fluid. That ambiguity is the source of risk and it is why portfolio diversification is so important. Your investment allocation reflects your ability and need to accept some market risk without putting your financial future in jeopardy. In an uncertain world, we anticipate these ups and downs and it’s important to not let them distract us from the long view of achieving what matters most to us.
As always, we look forward to your questions and concerns!
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