Breaking Down the U.S.-China Trade Breakdown
May 13, 2019
By Mike Moreland
Vice President - Investments
After a tremendous start to 2019, market activity in early May took a decidedly negative turn. Of course, it’s all about trade and the escalation of tariff tensions between the U.S. and China. Toss in growing threats of a confrontation with Iran, and the path of least resistance was a market downturn.
Failure to reach a trade agreement with China will disproportionately affect U.S. manufacturers and agricultural producers. While all consumers will potentially pay higher prices on electronics and other imports, the major headwinds in the U.S. will be relatively concentrated. Unfortunately, the Midwest will be front and center of this standoff.
What does a breakdown in U.S.-China trade talks mean for investors?
What are the ramifications of a breakdown in talks? First, assuming the worst (no near-term resolution), economic growth will slow. After a surprisingly strong first quarter, expectations for the remainder of 2019 are less sanguine. Absent an end to the impasse, the outlook for economic activity will be downgraded further from the associated impacts on consumer confidence and spending, industrial production and export activity. Higher import prices might lead to an uptick in headline inflation; this may be a factor in the Federal Reserve’s commitment to maintaining a stable stance despite current price data well below the Fed’s target.
Trade, tariffs and tension: What will happen next?
We believe an agreement will be reached. The timing is uncertain, and thus volatility will remain elevated. At the same time, there is too much at stake for both China and the U.S. to walk away from the bargaining table. The resolution will arrive when both parties can claim at least partial success. We expect this to be sooner rather than later, although odds for a quick agreement are diminishing.
Our strategies will not change dramatically based on what might happen. Instead, we will invest consistently. Portfolios under our management will remain conservatively structured, broadly diversified, and focused on the individual client’s long term goals and risk tolerance. This philosophy has served well for many years through many different environments. We expect it will do so going forward.
Please contact your advisor for more insight on your portfolio’s positioning to meet the challenges of today and the opportunities of tomorrow.