Since President Trump announced his intention to impose tariffs on all countries the stock market has been reacting-based on investor concerns in reaction to the media. All indications at the time of this writing are that the tariffs would be applied to all countries, although that remains unknown. This development has risen the speculation of a trade war with the US’s major trading partners including the EU, China, Canada, and Mexico. Trump has softened his stance by indicating that countries that treat the US fairly would get relief from the tariff, although that remains unknown. A global market doesn’t avoid harm from the strategic targeting of tariffs; international fallout may follow.
But is the possibility of a trade war and tariffs on imports as dramatic as it sounds? Consider that the relationship between the US and its trade partners is quite frankly, lopsided. The US imports four times more than it exports to the trade partner countries. Political retaliation from other countries toward the US can negatively impact imports coming into the US resulting in increased costs on items such as clothing, food, and lifestyle items such as electronics. Agricultural exports will suffer additionally after experiencing a decline the past two years. We can only assume we are in for a bumpy ride if this ‘tariff talk’ continues.
The US may stand to benefit from buying more goods from its own home-based companies if imports become too expensive. Although certain imports are deemed necessary, such as food not grown in our climate, is a trade war stand-off enough to bulletproof the US economy? For now, the trade war and tariff talk is merely a war of words as the proposed tariffs will not go into effect until June 2018. Factors to consider:
- Tariffs and trade wars typically lead to higher inflation and lower economic growth which has a negative impact on the markets.
- While trade restrictions will create headwinds for the equity markets, ultimately it is high valuations that have a bigger long-term impact.
- Inflation protection strategies should benefit from potentially higher inflation if this policy shift does materialize.
- Limited duration of fixed income should buffer from rising rates driven by higher inflation caused by these policies.
These factors may not apply to all investors which is why we welcome your questions regarding your portfolio and how it may impact.