• Wealth Management

Concern About Trade Conflicts

The tenor of trade disputes is changing. They now pose a greater risk to the U.S. economy and markets.

Trade conflicts are escalating and, as much as I hoped they wouldn’t become a serious concern to markets, I now fear that that they could.

In April, I didn’t see the risk of trade protectionism as a major threat to markets and the economy. At that point, it was mainly political posturing and confined to specific areas like washing machines and solar panels. It did not originally appear that a massive philosophical shift was underway in the U.S., whose companies have seen such extraordinary profit margin expansion occur as a result of globalization.

The tenor of the dispute is growing into a multi-front confrontation, as other countries are now poised to retaliate with tariffs of their own. An estimated $520 billion of U.S. imports, or 21% of the yearly total, is now in play, including materials, autos and many items imported from China.

That amount is large enough to hit the U.S. economy and markets in a more serious way, hurting confidence, stimulating inflation and acting as a counter weight to tax reform stimulus.

Below are four key reasons why trade risks are higher now:

  • This isn’t just about China. Disputes are with the countries on our borders, Canada and Mexico, as well as our historic allies in the Group of Seven.
  • Impact to corporate profit margins could be significant. In today’s globally connected economy, manufacturers often use imports in their supply chain and those costs could be going up. This is a big reason why reducing and taxing foreign imports may hurt American companies and consumers.
  • Many of our exports are easily substituted. Agricultural and energy commodities constitute many of our exports. If we make our exports more expensive, foreign buyers can likely source them elsewhere.
  • Global growth momentum is just starting to wane. Tariffs will act as a headwind to global growth, which may have already peaked for this economic cycle.

Bottom Line: Investors with outsized gains in small caps and tech leaders may want to rebalance their portfolios. Consider reallocating assets to diversify broadly across sectors. That’s the best way to prepare for the second- order effects of trade wars that may be coming.