Market Commentary - July 2018

As expected, trade war talks have equity and bond markets on edge, especially European and Emerging Markets. Tensions continue to escalate as do the retaliatory threats coming from all sides, specifically between U.S. and China. Last month President Trump asked his administration to compose a list of $200 billion in China goods for levies and would add another $200 billion if China retaliates. This is in addition to the $50 billion already imposed. While these numbers are large, no one knows how much of this is posturing and how much will actually take effect. China has begun to retaliate and President Xi said the country will not back down from engaging in a trade war. The headlines sound frightening and all the dooms-dayers were definitely all over this latest fodder. 

Many of the every day goods we use (cell phones, computers, TV's, clothes etc.) are imported from China and certain tariffs would increase prices which would be passed on to the U.S. consumer and in turn could lead to an economic slow down. Now the good news is as of this writing the updated list does not include cell phones or televisions, but if things continue to escalate, they could be added. Considering current deficit levels and rising rates, an unexpected economic slow down would be less than ideal. Unfortunately this "trade war" situation doesn't have a set timetable, so we may experience more anguish before obtaining any type of resolution. The markets hate uncertainty but even worse it hates uncertainty with no time table. 

As an industry, manufacturing makes up 11.6% of U.S. GDP and has become a smaller segment as other industries have picked up the slack. While this limits the number of new manufacturing jobs being created in the U.S., it leads to cheaper goods and leaves consumers with more money in their pockets to spend on other things. It should not be a shock that the U.S. runs trade deficits with most countries as labor costs and standards of living in the U.S. tend to be higher than most, so an influx of manufacturing jobs to the U.S. seems highly unlikely and corporations would look to outsource manufacturing labor to another country with cheap labor costs as opposed to bringing those jobs here. It is important to remember that publicly traded companies are focused on protecting profits, growing the bottom line and answering to shareholders. So unless the U.S. is ready to embark in a trade war with every country, they don't appear to have much leverage here. Also, who will take the jobs even if they were moved to the US? Limiting immigration won't help fill the jobs and at 4% unemployment people are already working. The only way to lure them away would be higher pay which brings us back full circle to either higher costs or sending the jobs to another country. 

The reality is much of this could just be "tough talk" and amount to little, but it's important to remember that threats to global markets always exist. They just feel worse when it is politically driven because it adds emotions to the mix and the one thing that doesn't mix well with investing is emotion.