As of 7/18/2018
- Although the unemployment rate rose slightly to 4.0% in June, it remains low by historic measures
- Consumer and producer prices edged higher last month due to rising energy costs
- The U.S. imposed $34 billion in tariffs on exports from China
- 2nd quarter S&P 500 earnings are set to grow by double-digits for the fifth time in the last six quarters
- The U.S. economy likely grew at a faster pace in the 2nd quarter, with an estimated annualized rate of 4.0%, which would be the fastest pace in nearly four years
- Trade tensions could lead to some unpredictability in the markets this summer
Data Source: FactSet
Growing trade tensions
It’s certainly no secret that global tensions are elevated. The economic relationship between the U.S. and the rest of the world appears to be strained on multiple fronts.
The U.S. has already applied steel and aluminum tariffs, affecting many of our closest trading allies, including Canada, Mexico and Europe. This comes on top of tariffs on solar panels and washing machines applied earlier in the year. Just this month, the U.S. installed a 25% tariff on $34 billion worth of Chinese imports and plans are to expand that figure to $50 billion in July.
In most cases where the White House has implemented tariffs, each country or region responded in kind with tariffs against U.S. exports.
Plans to impose new tariffs
The president is now pushing for a new 10% tariff on an added $200 billion worth of Chinese goods. This could include items such as clothing, TV components, refrigerators, and furniture. A review process will precede the implementation of these additional tariffs, most likely delaying potential implementation to late August or early September. In response, China has said it will counter any additional U.S. tariffs to protect its economy.
Is an extended trade war with China inevitable? We believe the U.S. and China can sort through trade differences while minimizing damage to the global economy.
We anticipate the business community will express its concerns about moving forward with additional tariffs. Nevertheless, corporate leaders, as well as Congress, have few options to curb the tariff threat if the White House chooses to escalate the situation. Tariffs are being implemented utilizing laws that give the president the flexibility to do so primarily citing national security concerns.
Does this mean an extended trade war with China is inevitable? We still believe a worst-case scenario is unlikely, but tensions could get worse before they become better. Cooler heads should prevail, and we believe the U.S. and China can find ways to sort through trade differences while minimizing potential damage to the global economy.
So where does this leave markets?
Stock prices could be more volatile this summer due to trade tensions. The direction of equity markets may be difficult to gauge, and large multi-national companies could delay important business decisions until trade tensions cool.
Importantly, global supply chains are deep, complicated and likely to be disrupted by additional tariffs. The result: Companies could run less efficiently as they seek to avoid tariffs, input/output costs could rise, and demand could potentially cool. The concern is that this will begin to chip away at corporate profit growth. The fallout could be additional pressure on stock prices over the near-term.
Thus far, the impact of increased tariffs has not dented overall economic and corporate growth.
If trade tensions can cool from here, the focus could come back to the fundamental picture — which would be a positive for asset prices.
The U.S. and China will remain strategic rivals
At the heart of today’s trade dispute, the U.S. is growing more concerned about China’s technological power and influence, not only in Asia but across the globe. Conversely, China fears its access to technology may be unplugged by the U.S., and its place in the world will be diminished. Finding answers to these issues will not be easy or quick, but we believe they will manifest themselves in the way each country addresses the evolving trade situation.
The U.S. and China in many ways are strategic rivals, and trade is but one way in which the two countries will compete for dominance over the coming decade. As a result, it’s natural to expect tensions between the U.S. and China will ebb and flow over time. We believe the two economic superpowers will ultimately find ways to coexist and, hopefully, prosper in unison.
Admittedly, that assessment seems optimistic considering escalating trade threats today, but this big picture view helps temper some of the short-term noise in trade relations at the moment.
As of July 18, 2018
Data source: Morningstar Direct