Investment Insights: The U.S. heavyweight comes out swinging

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Stock markets tumbled into the red on Monday as President Trump took to Twitter to demand that all trade barriers and tariffs against the U.S. be scrapped, or else they will be met with “more than reciprocity” – a threat that was targeted at the European Union, China, and others.

Black-and-white shot of a male boxer's arm hitting the side of a punching bag, releasing an explosion of chalk dust.The S&P 500 declined over 2% before recouping some losses in intraday trading, while international developed and emerging markets sank about the same amount, according to MSCI data. Further escalation is likely in store, and the Trump administration is purportedly working on a two-pronged approach in the conflict with China that could include restrictions on investment.

The fierce trade battle between the U.S. and China has begun to spill over into foreign and economic policies. After threats of higher and higher tariffs between the two countries neared their limits, both administrations began the process of identifying other ways to lash out economically. One strategy for the U.S. will likely involve a restriction on foreign investment in technology, a scenario we have outlined previously. The Treasury Department appears to be moving forward with its plans to block companies with 25% or more Chinese ownership from investing in any U.S. companies deemed to have “industrially significant technology.” The Commerce Department will be in charge of the second of the two strategies, which would restrict these same technologies from being exported to China. The official announcement for these policies is expected this Friday, and the first round of tariffs on $34 billion of Chinese goods may go into effect on July 6.

The Chinese financial markets have not been immune to these escalations as investors have withdrawn in fear of further declines and restrictions. The Shanghai Composite, the predominate gauge for Chinese stocks, officially entered a bear market yesterday when the index declined 20.1% from a high in late-January. China’s central bank has already stepped in by cutting reserve rates to allow around 700 billion yuan to flow into the financial system and help weather the conflict. Historically, the Chinese government has directly or indirectly influenced its stock markets in special circumstances and may do so again if the downward slide continues.

Even America’s closest allies have been pulled into a tough boxing match over trade. In retaliation to steel and aluminum tariffs, the European Union will be taxing around $3 billion worth of U.S. goods, including bourbon, jeans, and motorcycles at a 25% duty. Harley-Davidson reportedly will be moving some of its production overseas due to the tariffs. President Trump has hinted that he may react by imposing a tariff of 25% on imported vehicles – the U.S. currently taxes imported cars from the European Union at 2.5%. Canada and Mexico have also joined the fray after the U.S.-imposed metals tariffs and are placing their own retaliatory tariffs on $12.5 billion and $3 billion worth of U.S. goods, respectively. Imposed tariffs would likely lead to price increases for domestic and foreign consumers, and impact corporate profits.

Our team continues to be wary in the current geopolitical environment, particularly as these tariffs and policy changes have a multitude of effects on global financial markets. The U.S. has engaged in intense trade disputes on multiple fronts, and some world leaders have cautioned that these activities could pull the global economy into a recession. While the probability of a recession is rising, we believe it remains a fairly low likelihood currently. However, the context of a U.S.-versus-the-world trade war combined with the tightening activity of central banks globally may lead to further negative effects on the markets and eventually economic data. While we maintain a hopeful outlook for international trade and diplomacy, we continue to review our strategies for opportunities to decrease risk and allocate to asset classes with lower correlation to more volatile assets.

Chart showing various market returns as of 6/26/18

 

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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. The information in this newsletter is for informational purposes only and is not intended to be investment advice or a recommendation. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

 

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