Monthly Markets Memo - July 2018
by Dan Zalipski, CFA & Scott Rosenquist, CFA
The U.S. equity markets moved higher over the past month. They found support in economic reports on expanding manufacturing and service sector activity, strong retail sales, and a positive employment report. Fixed income trimmed their year-to-date losses as investors sought out safety from trade related headline risk. International markets continue to struggle this year as trade-related concerns and a stronger dollar continue to weigh on the space. The trade issue has also spilled over in to commodities, which have suffered a recent price collapse as fears of a global slowdown continue to build.
With the tax cuts enacted and the economy set to accelerate, President Trump fired up the next item on his agenda: trade. Relative to the rest of the world economy, the U.S. is in a position of economic strength. Strategically, this could be an ideal time. President Trump started issuing tariff threats for steel, aluminum, and various goods to friend and foe alike. His main targets thus far have been China, Europe, Canada and Mexico. The targeted countries retaliated with their own tariffs targeting imports from the U.S. such as pork, fruit, and motorcycles, to name a few. This past month, the Trump administration enacted another batch of tariffs on $34 billion worth of Chinese imports. Predictably, China retaliated with tariffs on $34 billion worth of U.S. goods with a majority focused on agriculture products.
The ink was barely dry on the latest order of tariffs when the Trump administration announced its intention to target additional tariffs on almost $200 billion dollars of imported Chinese goods. China would be unable to respond in-kind as it only imports approximately $170 billion of U.S. goods per year, including the $34 billion already targeted for tariffs. Some speculate that China may retaliate by devaluing their currency, or by liquidating some of their U.S. Treasury holdings. These moves would be damaging to the U.S. and threaten the stability of the global markets. Chinese officials have indicated they would not take these steps, but the concern lingers. For now, it would seem the uncertainty surrounding this trade war is doing more damage than the trade war itself.
While other countries have been involved, Trump is primarily targeting China with these actions. Many believe China has engaged in unfair trade practices for decades and the U.S. is simply looking to level the playing field. These unfair practices reportedly include counterfeiting famous brands, stealing trade secrets, and pressuring companies to share technology with Chinese firms as a condition to gain access to China’s large market. While there seems to be few who disagree with these accusations, there are those that are rather outspoken with respect to the approach being taken to address the situation. Critics believe that a unified front against China would yield better results with less damage to the economy. It is thought that coming together with your allies to pressure change would have been a better approach than going at it alone. With neither side showing any sign of capitulating, this ongoing dispute could be with us for some time.
The rising trade restrictions have the potential to damage economic growth. With the U.S. and China accounting for 30% of global GDP, the impact could be broad. Fortunately, the first wave of tariffs should have a relatively small impact on GDP. Stock prices are supported by remarkably strong earnings on the back of the recent corporate tax cuts. The economic fundamentals remain strong, providing support to U.S. companies working to navigate the rapidly changing trade policies. The latest threat of tariffs on imported automobiles from Europe is concerning and would certainly test both our economy, and the markets’ resiliency. Should this trade war continue to escalate, the impact would likely be higher consumer prices, lower demand, and a general slowing of economic activity, all of which are emphatically negative for the U.S. economy.
“The president has raised serious issues that are pretty accurate around China that need to be fixed…” “…work with our European allies and Japanese allies and go to China with a common front. Not against them.” – Jamie Dimon, CEO of JP Morgan Chase
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