I wanted to provide some thoughts on the latest round of the trade war. Quick summary below followed by my thoughts for the nerds that love this stuff.
Earlier tariff plot twists didn’t stop global markets from reaching new highs and I doubt this latest batch will either.
What’s going on with China and should I be concerned?
Global markets continued their slide on Monday as investors reacted to a fresh round of tariffs in our nation’s trade war with China. While we have seen this movie before the market hasn’t become desensitized to the drama. This left the S&P 500 around -6.0% below its high. While the media is certainly enjoying the market drama the reality is the S&P 500 is still up nearly 15% for 2019 and 38% over the past three years.
Last week President Trump announced a new 10% tariff on $300 billion of imports from China starting September 1st. This round is different from the prior tariffs in that it will be impacting consumer goods such as electronics, apparel, and phones. These tariffs, if implemented, will more directly be coming from the wallets of consumers which fueled the market’s pullback.
This latest round of tariffs does nothing to change my longstanding view: while market sentiment will be impacted in the short term the tariff threat thus far is simply too small to impact this market over the long haul. Imagine tariffs as a detour rather than a roadblock for markets. If we calculate the total sum of the current & threatened tariffs on both sides it accounts for less than 0.3% of global GDP. Tariffs can get much worse and still not create the trillion-dollar shock required to derail a global economy.
As we have discussed many times in the past politics and investing don’t mix well. Unless the trade war takes a dramatic turn for the worst it is simply political brinkmanship for now. While I would love to see a trade deal soon my view is that it will not happen until at least early/mid 2020. It is not in President Trump’s political interests to forge a deal in 2019; he will wait until closer to his reelection so he can use it as fuel in his reelection campaign. Appearing “tough on China” in the meantime supports the President’s political interests (regardless of what the market hopes for).
In short: earlier tariff plot twists didn’t stop global markets from reaching new highs and I doubt this latest batch will either. Pullbacks and volatility are a normal feature of investing.
P.S. On an unrelated note: Bitcoin is NOT a store of value. This idea has come across my desk a few times over the past week. An instrument with 75x the volatility of a US Dollar is not a store of value. The folks putting out that argument are either kidding themselves or ignorant. I am not anti-bitcoin but this idea floating throughout social media is absurd. I will put out another piece with more detail soon.