In view of recent developments, we want to provide an update on trade negotiations between the U.S. and China.
What Has Happened?
The disagreement in trade policy and practice between the two global economic giants had recently occupied a calmer plane. But tensions resurfaced last week when the U.S. announced that it would increase tariffs to 25% on $250 billion of Chinese goods. This announcement demonstrated that the U.S. is serious about its dissatisfaction with how the Chinese government approaches intellectual property rights and its requirement of forced technology transfers from foreign companies to domestic Chinese companies, which are proxies for the Chinese government.
Today China announced that, in response to the additional U.S. tariffs, it will raise tariffs on $60 billion of U.S. goods imported by China beginning in June.
Last week and continuing today, the markets reacted with an increase in volatility.
The reason for the recent stock market fluctuations seems to be that equity markets had priced in an imminent and smooth resolution to the trade dispute based on prior news reports and statements from the U.S. administration. But as we note in our full Sage Insights commentary for May, we think that trade-related risks may be a source of market volatility throughout the year.
Markets were at all-time highs just a week ago, and corrections are normal in this context. The recent escalation of tensions between China and the U.S. increases uncertainty around the timing of any possible agreement, and equity investors have begun to factor this uncertainty into current prices. More volatility may be forthcoming. Ultimately, we believe that both countries stand to benefit from a reasonable and mutually agreeable deal, and both have that as a strong incentive to reach an agreement. The timing of any such accord, however, is now more uncertain than it was anticipated to be just two weeks ago.
- Why Resolution Could Come Sooner:
- From China’s Perspective: The Chinese government is not in the strongest position economically. It has been trying to bring down debt levels and correct financial imbalances in its economy, and it does not want to continue providing the fiscal and monetary stimulus that has recently stabilized its growth levels. If its economic data softens, China could be forced to soften its approach to negotiations.
- From the U.S. Perspective: Political considerations — specifically, Trump’s desire to demonstrate his ability to conclude a significant international trade deal and prevail in diplomacy — may provide the administration an incentive to reach some agreement with the Chinese this year. The goal would also be to prevent the trade dispute, as well as the economic and market uncertainty that it brings, from being a prominent issue next year as he runs for re-election.
- Why Resolution Could Come Later:
- From China’s Perspective: If the Chinese are unwilling to budge on intellectual property rights and forced technology transfers, then an agreement may be much farther off than the markets had thought, and more price adjustments in stocks could continue.
- From the U.S. Perspective: If the U.S. continues to see certain concessions on these topics as prerequisites to any deal, then a full resolution may be difficult to reach any time soon. Moreover, although risky, it is possible that the President may believe that defying the Chinese and taking an unbending approach to a deal will project strength going into the 2020 election year.
The most important advice we have for investors continues to be to try to keep market volatility in perspective. We build diversified, multi-asset class portfolios focused on long-term durability. Unless something has changed in your financial life, try to remind yourself that the investment strategy you have in place is most appropriate for you because it is aligned with your investor profile (risk tolerance and return objectives) and financial goals. Volatility is to be expected with investing. Attempting to predict short-term market fluctuations or to time the markets are certainly not something that we recommend.
The information contained in this report has been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or estimates in this letter are forward-looking statements and are based upon certain assumptions. Other events which were not taken into account may occur and may significantly impact our opinion. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly in this communication will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. You should not assume that any discussion or information contained in this communication serves as the receipt of, or as a substitute for, personalized investment advice from Sage Financial Group. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Sage Financial Group is neither a law firm nor a certified public accounting firm and no portion of this communication should be construed as legal or accounting advice. A copy of the Sage Financial Group’s current written disclosure statement discussing our advisory services and fees is available for review upon request.
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