In recent weeks, trade policies have become the dominant theme driving the financial markets, which has led to a retesting of mid-February lows. Attention has turned to the critical U.S.-China relationship and the outcome of the U.S. government’s ongoing investigation into China’s intellectual property violations. On Friday, Beijing said it may target 128 U.S. products with an import value of $3 billion in retaliation for moves by the Trump administration to impose tariffs on foreign aluminum and steel imports. While Trump also announced plans for up to $60 billion in Chinese imports this week, China did not officially connect its Friday threats to that announcement. The deepening rift between China and the U.S. sent a chill through financial markets with the Dow Jones Industrial Average posting its worst week since January 2016. Overall, domestic companies are not prepared to have their supply chains cut off or their business models disrupted should trade barriers start going up, and investors are predicting negative consequences for the global economy as a result.
While the developments are concerning, we retain our conviction in the base case of steady global growth and caution against reacting too negatively to protectionist rhetoric. One must remember that there is a difference between rhetoric and reality, and both the U.S. and China recognize the mutual benefit of trade and a healthy global economy. The process of imposing tariffs is fraught with international legal challenges. For example, in mid-January the Trump Administration imposed tariffs on the solar industry and was hit with a wave of legal challenges from three Canadian solar companies, while five U.S. trading partners launched complaints at the World Trade Organization. Legal challenges such as these led to the undoing of George W. Bush’s steel tariffs in 2003.
Furthermore, given the globalized world that we live in, significant parts of the production process cannot be easily switched from one supplier to another – particularly in the technology industry. Because of this, the tariffs could lead to the unwanted side effect of accelerating inflation in the U.S. economy. Higher inflation could encourage the Federal Reserve to raise interest rates more quickly than anticipated, which could also slow the economy. It is unlikely that President Trump wants to be the catalyst for undoing one of the longest bull markets in history.
While swift moves in the market can be unnerving to investors – especially after a year of historic period of calm in the markets – it is important to note that the MSCI ACWI All-Country World Index, a measure of the global stock market, is only down 2.31% year-to-date. It is nearing an important test of support at its 200-day moving average and its mid-February lows. We continue to monitor the situation closely and will make changes to the LightPoint Portfolios as our assessment warrants. The hope is that China and the U.S. will remain rational and work together to keep trade relations stable.
Thank you for your continued confidence! As always, please reach out to us with any questions you may have.
Hillary Sunderland, CFA
Chief Investment Officer
Beacon Wealth Consultants, Inc.