Navigating the Pitfalls of Trade Tensions - May 20, 2019

Short-term traders took their cues last week from U.S./China trade headlines. Stocks tumbled on Monday after China announced new levies on U.S. exports (WSJ).

But shares rallied on Tuesday when President Trump said he believes trade talks are “going to be very successful (Reuters).” Shares added to gains on Wednesday on reports he plans to delay any auto tariffs for up to six months (Financial Times).”

What if – 3 possible scenarios

What if the U.S. and China quickly come to terms – an enforceable trade deal is achieved? It’s the best outcome. The playing field is more level and exporters benefit, U.S. intellectual property is protected, and any improvement in business confidence could translate into a new round of capital spending.

What if talks completely break down? We could see another round of tariffs that could crimp economic growth and boost prices at home. Currently, investors aren’t expecting this outcome.

What if negotiations drag on for several months, maybe through year end? The two sides appear to be far apart. Still, talks are better than no talks.

Who get hurts the most?

Both sides won’t escape unscathed, but China probably has more to lose. China’s exports to the U.S. accounted for 4.2% of its economy in 2018. We are China’s best customer. However, U.S. exports to China accounted for just 0.9% of U.S. GDP.

Plus, if uncertainty drags on, some companies may shift production out of China to avoid U.S. barriers, further harming its economy.

A quick deal that creates fundamental, enforceable reforms is the best outcome for investors. However, that may not be forthcoming. So, what if negotiations drag on? Or worse, talks completely break down?

Increased market volatility would likely follow, as investors attempt to price in slower global economic growth and the potential fallout of any additional retaliatory barriers.

But, we’d eventually get to a ‘new normal.’ Economic growth would not be optimal. But businesses and consumers would adjust over time, and I believe, so would investors.

Investor’s corner

Control what you can control. You can’t control the stock market, and timing the market isn’t a realistic tool. But, you can control the portfolio. Your plan should consider your time horizon, risk tolerance, and financial goals.

Risks never abate, but stocks have a long-term, albeit, uneven upward bias. The investment plan doesn’t eliminate risk, but it is designed to capture the upward bias and put you on a path towards your financial goals.