trade tensions

By Schwab Newsroom

Investors took most recent potential market-moving events in stride: a tempestuous meeting of the G7 in Quebec; a historic North Korea/U.S. summit in Singapore; and another quarter-point rate hike by the Federal Reserve. But the announcement of the U.S.’s planned tariffs on Chinese imports has sent stocks lower.

Back in March, trade relations between the United States and China began to deteriorate when President Donald Trump imposed new tariffs on aluminum and steel. In response, China’s Ministry of Finance announced a new round of tariffs of up to 25% on U.S. products.

Although at the time, many saw the jockeying as having more political than economic implications, Trump subsequently announced he was considering imposing tariffs on an additional $100 billion of Chinese imports, furthering concerns that what began as a mere spat could turn into a more far-reaching trade war. Markets roiled, but within a few days had calmed.

Trump made good on his threat, unveiling plans to impose tariffs of 25% on $50 billion in Chinese products, $34 billion of which is set to go into effect on July 6. And tariffs on an additional $100 billion of Chinese goods are still on the table. China retaliated, targeting high-value U.S. exports, including farm products, cars and crude oil.

Last Monday, Trump announced the threat of further tariffs, asking his administration to identify a second tranche of $200 billion of Chinese goods subject to 10% tariffs, “to encourage China to change its unfair practices, open its market to United States goods, and accept a more balanced trade relationship,” according to the president’s statement. Not surprisingly, stocks opened lower on Tuesday in response to the proposal.

Despite the health of the U.S. economy, markets are understandably wary of an all-out trade war between the United States and China. Are we indeed headed there? And if so, what are the implications?

Implications of trade tensions turning into a trade war

While there’s no precise definition for a trade war, the potential impacts are generally understood. The fear is that actions and counter-actions by the U.S. and China could escalate to a point where they hamper trade and investment and hurt both economies. And escalating confrontations between the two economies could spill over to other countries, with the potential to considerably impact the global economy.

We’re still short of that point, though.

“Let’s call it a trade skirmish, as we’ve moved beyond just rhetoric, and some concrete action has taken place,” says Mark Riepe, head of the Schwab Center for Financial Research. “The risk of one or more skirmishes turning into a full-blown trade war is real, which is why the stock market trembles when it senses tensions ratcheting up. Monday’s proposal pushes us further down that path.”

Although thus far, China’s retaliatory tariffs affect a small portion of U.S. exports — $50 billion constitutes roughly 0.25% of the U.S. economy — they have the potential to derail market confidence and delay investment decisions.

According to Schwab Chief Investment Strategist Liz Ann Sonders, “Protectionism broadly — and tariffs specifically — have historically boosted inflation while causing economic growth to slow, which could lead to ongoing bouts of market weakness and heightened volatility.” Also, the magnitude of the impact to individual sectors can vary depending on the nature of the measures and countermeasures.

In any event, U.S. tariffs aren’t scheduled to go into effect until early July, so there’s still time for negotiation and the potential to avoid a negative outcome, but risks have risen. While administration officials have said they don’t want to unleash any trade wars, markets are likely to remain cautious.

What you can do now

Our belief is that the markets will continue to adjust as the situation evolves. However, trade isn’t the only factor driving equity markets. The rest of the economic and corporate earnings picture is bright and offers a potential counterweight to trade-associated downturns.

As always, periods of market volatility offer a reminder for investors to review their long-term strategic asset allocations, including the timeline for their goals. For goals that have a longer horizon, short-term volatility should be of little concern.

However, market volatility can sometimes reveal that investors aren’t as diversified as they should be or that they have a lower risk-tolerance than they thought.

Beyond that:

  • Try to remain calm

Volatility often leads to knee-jerk reactions that are rarely in investors’ best interest. Let patience prevail as negotiations play out.

  • Stay diversified — globally

Diversification can help you manage volatility. Global stocks have recouped half their losses from this year’s correction, closely following the average pattern for corrections seen over the past 50 years.

  • Hang tight

While market volatility can be unnerving, it’s a normal — and, indeed, expected — part of the investment cycle.

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About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC  

Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly $475 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.

Additional Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party. Investing involves risk including loss of principal. International investments are subject to additional risks such as currency fluctuation, geopolitical risk and the potential for illiquid markets. Investing in emerging markets may accentuate these risks. Investing in emerging markets may accentuate these risks. Past performance is no guarantee of future results. Diversification does not ensure a profit and do not protect against losses in declining markets.