Our goal is to keep you well informed about what’s happening in the markets and economy so you’re more in control of your financial future. Here is a brief recap of what has been going on over the last month or so and what we expect in the month ahead. As always, if you have questions or concerns, don’t hesitate to contact us.
The ongoing U.S. / China trade conflict
What we know: Trade talks between the US and China broke down last week over accusations from President Trump that the Chinese delegation had attempted to change the deal at the last minute. Despite last-ditch efforts to revive the talks, the Trump administration order tariff increases from 10% to 25% on roughly $200 billion of Chinese exports. Yesterday, China retaliated with increased tariffs on roughly $60 billion of US exports.
Tariffs are essentially an extra “tax” paid by consumers, not a direct payment from one country to another. The net effect is if goods are more expensive to buy then consumers will buy less of them.
What is the market effect so far? Global markets have angled downward since President Trump’s tweet last weekend about the potential for new tariffs. Yesterday marked the most volatile day as China retaliated with the S&P 500 off 2.41%. Since 5/6/19 the S&P 500 is down 3.29%. It’s worth noting the entire globe has sold off over the course of the last week, not just the US and China.
What do we expect going forward? We expect this volatility to be fleeting as the headline risk fades. Further, although certain parts of the US economy will be hurt by the new tariffs (ex: soybean farmers) the total amount of trade with China and the related tariffs aren’t large enough alone to induce a recession here in the US.
The same can’t be said for China. Last year the US exported $180 billion in goods and services to China, which is 0.9% of US GDP. Meanwhile, China exported $559 billion to the US, which is 4.6% of its economy. The bottom line is China needs the US more than the US needs China... and they know it.
We, therefore, expect some sort of renewal of negotiations in the coming days during this transitionary time period where tariffs have been announced but have not yet gone into practical effect.
However, just because China needs the US more when it comes to trade doesn’t mean China can’t impact the US economy. In years past during trade disputes China has slowed American imports at the docks investigated US companies and devalued its currency. If China wanted to deploy the “nuclear” option they could also begin dumping US Treasury securities on the open markets to spike rates and tighten liquidity.
Anyone with a microphone these days can invent a scenario where some sort of Smoot-Hawley-like global trade war happens. However, our opinion is the odds that occur are very low at this point.
What data are we reviewing? Long-run economic data: The market volatility we are experiencing is currently speculative headline risk, not a function of underlying economic reality. As such, long-run economic data looks good... but we are watching for the impacts that may follow.
Long run market data: Long-run implied volatility remains much lower than shorter-term calculations such as the VIX. We will continue to calculate over the remainder of the week to see how that shifts, but after the close, we are seeing equity futures already moving flat to higher. That’s a good sign equity markets will hold and move upward soon-ish.
Short term market data: While certainly a shock to the short-term system, we would still need to see more sustained volatility over the remainder of the month for our calculations to see the potential for a systemic problem in equity markets.
Bottom line & Course of Action: Clients Only
Your TVFP Team
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