July 6, 2018
This morning, the United States and China exchanged their first "blows" in the well-publicized trade "war." The United States enacted tariffs on $34 billion of China exports to the United States and China retaliated with an equal amount on exports to the United States. Both these moves were well telegraphed, with financial markets generally shrugging off the event, U.S. stocks strengthening and the U.S. dollar weakening during this holiday-shortened trading week. The key question now is likely to be “what happens next?”
The next move appears to be in the United States’ "court," with the U.S. administration studying and perhaps readying additional tariffs to bring U.S./China trade into balance, although indications are the next move will not be ready until this fall.
Economic impacts likely small this year
We expect the initial impacts on the U.S. economy to be modest at the aggregate level, although some of the possible near-term losers, such as soybean farmers, are already seeing significant impacts. The absolute size of current tariffs are small when compared to the stimulus generated. According to calculations by Strategas Research Partners, the recent tariffs will cost the U.S. economy about $12.5 billion in 2018 while tax cuts are generating expected benefits of $200 billion. Additionally, the total size of the U.S. economy is $19.96 trillion annually, according to the first quarter report on nominal gross domestic product (GDP). U.S. economic growth continued to accelerate through the second quarter as evidenced by a rebound in manufacturing confidence (based on the Institute of Supply Management Purchasing Manager survey for June) and still-strong growth in U.S. payrolls (which have gained an average of 214,000 jobs per month so far in 2018). Specific industries are likely to experience headwinds from the specific tariffs. China is the largest buyer of U.S. soybean exports and prices fell as much as 15 percent in the second quarter of 2018 in anticipation of tariffs, likely impacting the expected earnings for farmers at fall harvest time.
Asset price headwinds unlikely until next year
For now, we expect positive U.S. economic momentum to continue to support stock prices and earnings growth. Further expansion of tariffs later this year (especially if the tariff scope moves beyond China) could temper this momentum, but this is likely a 2019 or later event. Yesterday, President Trump cited up to $550 billion as an outer boundary for duties and tariffs on Chinese goods, so a risk to the market’s current assessment of this situation could be accelerated back and forth on tariff amounts and implementation timelines. That said, we anticipate that global stock markets will price in tariff impacts as implemented, rather than as expected, given the fluid and changing nature of trade discussions. We believe risks in markets are more balanced between stocks and bonds, for now. Earnings growth is unlikely to repeat the first quarter surge from tax cuts, but growth trends remain positive domestically, although more challenged abroad. Bond yields have risen, making fixed income investments somewhat more attractive, but yields remain historically low.
As always, we value your trust and are here to help in any way we can. Please do not hesitate to contact your advisor for insights related to your unique circumstances or if we can be of assistance.
Investment products and services are:
NOT A DEPOSIT • NOT FDIC INSURED • MAY LOSE VALUE • NOT BANK GUARANTEED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness.
Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.
Past performance is no guarantee of future results.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investment in debt securities typically decrease in value when interest rates rise. The risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher- rated securities.