Ongoing US-China Trade War: The good, the bad, the ugly

After another volatile week in the equities market due to the US-China trade war, most are left wondering if the 4th quarter of year 2018 will repeat itself. While the future is unknown, we can always try to anticipate the possible outcomes of the trade war. My prediction early January 2019 was that the trade war will be resolved in 2019 and we are yet to see that but only time will tell. At the present, we can conclude that volatility is back baby! Expect up-swings and down-swings till the trade war is fully resolved.

Recently, Trump announced on August 1, 2019 that an additional 10% tariff will be levied on the remaining $300 billion of goods. This led to the central bank of China lowering the value of the yuan relative to the US dollar to its lowest point in 11 years as a measure to combat the trade war. It has been speculated that the move by the Chinese central bank was to wield its currency as a weapon in the trade war. The U.S. Treasury Department came out with a statement that it had determined for the first time since 1994 that Beijing was manipulating its currency. While this is not fully known as the reason for certain, there are legitimate reasons why a country may choose to devalue its currency. As clearly stated by investopedia, it may seem counter-intuitive, but a strong currency is not necessarily in a nation’s best interests. A weak domestic currency makes a nation’s exports more competitive in global markets, and simultaneously makes imports more expensive. Higher export volumes spur economic growth, while pricey imports also have a similar effect because consumers opt for local alternatives to imported products. This improvement in the terms of trade generally translates into a lower current account deficit (or a greater current account surplus), higher employment, and faster GDP growth. The stimulative monetary policies that usually result in a weak currency also have a positive impact on the nation’s capital and housing markets, which in turn boosts domestic consumption through the wealth effect.

Following the tariffs announcement scheduled to take effect in September, the White House trade office announced it would delay tariffs on certain Chinese goods until mid-December and exempt others from a new round of import taxes. The Office of the U.S. Trade Representative insisted it would delay tariffs on cell phones, laptop computers, video game consoles, certain toys, computer monitors, and certain items of footwear and clothing until December 15, 2019. As you would expect, the market reacted positively to the news with optimism kicking back into the markets. The Dow Jones Industrial Average soared on the news and shares of electronics manufacturing companies such as Apple had very positive valuations at the end of the trading day. Recapping the tariff events since it officially started in March 2018, we can conclude that it has been a wild ride with the S&P reaching all time highs and also falling below correction levels within that period. A full timeline of each released statement and the market reaction can be found on Reuters.

So how should we react to this? while some may get lost in the trade war debacle, it is important to see the big picture through it all. Economists at Bank of America, Goldman Sachs and Moody’s Analytics have warned of the rising chance of a recession between now and the 2020 elections, blaming Trump’s trade policy in part. Some analysts predict a recession occurring within 18 months since the yield curve recently inverted (Short term interest rates being higher than long term interest rates), an indicator for previous recessions. It is important to be prepared to take advantage of high quality companies on sale during such a period. With this in mind, it is wise for investors to keep watching the markets and start cherry-picking the companies built on a solid foundation that they can add to their portfolio during that time. Never lose sight of the rules of investing we typically forget. Employing these qualities while investing is necessary for continued success. It is better to be focused on the long term and platforms such as M1 Finance provide investors free trading of stocks, bonds, exchange traded funds (ETFs) within taxable and retirement accounts.


Recent Posts