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Trade Wars – Tit-for-Tat Retaliation - August 7, 2019

The U.S. ratchets up trade tensions by slapping a 10% levy on the final $300 billion in Chinese imports. China retaliates by weakening its currency.

The early read—the heightened uncertainty takes a toll on stocks.

Unlike prior barriers, the latest Chinese tariffs, which take effect September 1, hits mostly consumer goods.

The consumer drives growth

Q2 growth was driven by consumer spending – 4.3% annualized pace.

Fear—consumers resist higher prices, and the economy slows down too much.

By the Numbers

U.S. consumer spending totaled $14.5 trillion in Q2 (U.S. BEA data) out of a $21.3 trillion economy.

  • Goods = $4.5 trillion
  • Services = $10.0 trillion
  • Tariffs = $30 billion (10% on $300 billion of goods)

$30 billion out of $21.3 trillion is loose change. Consumers may slow purchases, but won’t stop buying iPhones, shoes, and apparel from China.

Investor’s corner

One side gets hurt less than the other, but no one wins a trade war.

Some larger names could get hurt. A well-diversified portfolio mitigates some of the worries.

Shorter-term, the biggest concern is the unknown: tit-for-tat retaliation begets tit-for-tat retaliation, which leads to additional uncertainty and volatility. Longer-term, economic activity is the most important determinant for stocks.

@LWMLLC