What’s With this Trade War?
In the last several weeks, President Trump has placed tariffs on billions of dollars of Chinese goods. The situation is changing rapidly; however, it’s important to understand what relevance this trade war has on your portfolio, especially if you are a retirement investor.
In short, high trading tariffs have led to stock market drops because costs increase, shortages ensue, and corporate earnings suffer. So far stocks have been fairly resilient however it has kept the market from rising even though earnings have been phenomenal and the economy is strong.
Let’s go back in history and see what the impact has been during other trade wars. In 1929, nationalism was spreading fast in the U.S. when Congress passed the Smoot-Hawley Tariff bill. What was the impact on the stock market? The Dow Jones dropped from 381 in September of 1929 to just 41 in July 1932, an 89% decline. By 1934, global trade had decreased by more than 60%.
George Bush imposed steel lumber tariffs and crop subsidies in 2002. The S&P 500 lost more than $2 trillion in market capitalization in the first year alone. In early 2003, these tariffs were lifted and the stock market recovered.
Fast forward to today. The Trump administration is taking a protectionist stance, not seen since World War II. The big question is who will be the winner?
This has yet to turn into a true massive trade war, although you would never know it by the rhetoric. The bottom line is that no one wins a trade war. These wars along with the increase in hostility with China, hurts world trade and global profitability. Corporations that do business globally will be severely impacted and will have disappointing earnings which in turn have a negative effect on the financial markets.
According to the World Trade Organization (WTO), America’s tariffs averaged 2.4% on a trade-weighted basis, while Japan’s were just 2.1%; however, Canada’s and the EU’s were both higher at 3.1% and 3.0% respectively both China and Mexico’s tariffs exceed 4%. America may have lower tariffs than other countries, but has higher duties.
President Trump has complained about the 270% duty that Canada imposes on dairy products. Yet, the U.S. has its own set of high tariffs, charging 168% on peanuts and 350% on tobacco. That will only get worse with retaliations.
The longer this goes on the more it hurts. American protectionism makes the dollar less appealing in comparison to Chinese currency, the Yuan, and the Euro. This could propel the Yuan to become stronger and possibly a new main reserve currency.
I agree with the concept of fair trade and I am especially concerned with the theft of U.S. intellectual property by other nations, most notably China. However, taking such broad strokes rather than strategic strikes, could be doing more harm than good. If technological intellectual property is the real concern, which is very likely, then just focus on that without hurting the rest of the economy.
My hope is that this is simply a political move by the administration to bolster the base in advance of the upcoming congressional elections. If history is any indication of what will happen, then Trump will eventually just declare victory and back off a bit, and everybody wins. I suspect that is what the market is expecting. If the trade war heats up, investors will be in for a dangerous ride. A ride none of us can afford if we are retired or in that retirement red zone.
It is times like these that make us all wary of the safety of our money, and rightfully so. It has never been more of a time to “Invest for need, not for greed™”, and investing your assets “tactically”. Never buy-and-hold, aka, buy-and-hope! It’s what we help our clients do everyday!
Cheers- Keith Springer