Hello, I hope this finds you well and enjoying the summer so far! Today is Friday, June 29, 2018 and I will share some thoughts on the current trade tensions.
It’s not news to anyone that trade tensions have been at least partly responsible for increased market volatility this year, but last week investors’ angst increased as the Trump administration announced tariffs on an additional $200 billion in Chinese goods – sooner than many expected.
When reviewing the current status of trade negotiations with China, I think it’s important to keep in mind what has actually been put into place and what can still be negotiated. To date, we have seen key tariffs put into place on only washing machines, solar panels, steel, and aluminum. The next stage of tariffs goes into effect on July 6th. And while there may be more, we typically see about 60 days from announcement to imposition of the tariffs to give businesses and trade authorities time to react which also leaves time for further negotiation.
Our base case at this point is that there is an eventual compromise with China and that the US economy and earnings growth trajectory continues. Here are a few reasons we believe this:
- No one wins a trade war: both countries care about their own self-interests, and shutting off trade would do significant damage to both countries.
- Fiscal stimulus: the amount of fiscal stimulus going into the U.S economy from tax cuts and deficit spending is far greater than the value of the already-announced tariffs.
- Art of the deal: President Trump has a track record of starting a negotiation from an extreme position and then moving towards compromise.
- Midterm Elections: are coming up and the Republicans do not want to do anything to damage their reelection chances
So here’s what we think you should do:
- Stay calm and keep perspective: as always, do not let your emotions get the best of you when it comes to making investment decisions
- Look for opportunities: volatility can create attractive investment opportunities
- Volatility is normal: remember this. Stocks on average experience a mid-teens selloff from peak to trough each year; so far this year we have only seen about two-thirds of that.
- Stick to your plan: it’s always best to have a plan before you need it so that market volatility doesn’t knock you off track
I hope this has put the trade tensions in perspective. As always, thank you for taking the time to read, and if you have any questions, please feel free to reach out.
Source: LPL Research
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