“I’m amazed how little politicians seem to have learned from history. Nobody is benefiting from a trade war” – Carlos Moedas

Trump Tweetstorm – Following New Chinese Tariffs on Imported US Goods – Pushes Markets Lower to End Week

Investors flocked to safe-haven assets on Friday following President Trump’s tweetstorm in response to the Chinese Commerce Ministry’s decision to impose 5% – 10% tariffs, or roughly $75 Billion, in import tariffs on US-made products, starting September 1st. These tariffs will target soybeans, coffee, oil, seafood and whiskey.

Additionally, beginning December 15th, tariffs on imports of US automobiles (25%) and parts (5%) will resume.

President Trump responded, as usual, via tweet, to say “American companies are hereby ordered to immediately start looking for an alternative to China”. It should be noted that the President’s statement here is not binding, and companies are not required to adhere to his “order”.

Trump next tweeted that the Fed can “show their stuff”, and soon after that tweet, attacked Fed Chair Jerome Powell, tweeting “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”.

Next, Trump tweeted that he will respond to the new Chinese tariffs accordingly.

In response to Trump’s series of tweets, markets almost instantly dropped across the board. The Dow Jones Industrial Average (DJIA) fell by 2.37% (622.19 points) to finish at 25,630.05, the Nasdaq dropped 3% (239.62 points) to finish at 7,751.77, and the S&P 500 dropped 75.7 points (2.59%) to close at 2,847.25. The S&P/TSX Toronto Exchange shed 215.88 points (1.33%) to close at 16,037.58.

After markets closed, Trump announced, again via Twitter, an increase on imported Chinese products from a 25% tariff (roughly $250 Billion) to a 30% tariff, taking effect October 1st. Lastly, he increased the tariff measures taking place on September 1st from 10% (roughly $300 Billion) to 15%.

It is worth reiterating that it is not countries who pay these tariffs; rather, it is the end users. Costs are always passed on to the customer. Thus, tariffs will drive inflation upward over time.

What Does This All Mean?

As we wrote about extensively recently in our Mid-Year Outlook, continuing trade tensions could push long-term bond yields downward and lead to an inverted yield curve. If an inverted curve persists for a couple of months, the risk of a recession could become more crystalized.

The US Fed’s 10-Year Minus 2-Year Curve has briefly inverted a couple of times now in the past 2 weeks and is currently at a razor-thin margin of 0.01%, as you can see in the chart below:

What Should I Do?

In our 2019 Mid-Year Outlook, we outlined a few key strategies to deal with volatile markets – many of which you will have already undertaken:

• Update Your Equity Portfolio – more growth-oriented equities (for example, technology companies) have different properties from defensive, dividend-paying equities (for example, banks). The more growth-oriented the company, the more exposed to market volatility. Thus, re-balancing the equities sleeve of your portfolio to include some defensive holdings is prudent.
• Keep Your Emotions In Check – investor psychology can lead to poor decisions in times of market volatility. Risk aversion (in this case, the bias of loss aversion) can lead people to cash out entirely. This attempt to time markets may “feel” like the right move; however, history has shown us that staying the course over the long term has proven to be the superior strategy.
• Ignore Market Forecasts – the ability to predict future market movements, be it equities or fixed income, is very, very difficult to successfully accomplish on a consistent basis. We do not have a crystal ball to rely upon, so we believe in the time-tested strategy of setting a long-term allocation, weathering pullbacks and investing in quality companies.

Sources: Globe Advisor, CNN Business

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.