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(Trade) War, Huh, What Is It Good For?

May 24, 2019

Our last Street Signs email warned sub-par stock returns were possible in the coming months following an ominous decline in rail traffic. Little did we know the catalyst would be an escalation of the Trade War with China!  Regardless, the Dow Jones Industrial Average is essentially unchanged since our last publication. 

Here’s our hot-take on the winners and losers of a trade war with China:

Tariffs 101

In an attempt to negotiate a trade deal with China, President Trump has increased taxes on goods they import to the United States.  Tariffs on foreign goods are ultimately a tax on U.S. businesses and consumers.  While Chinese exporters may shoulder part of the tariff burden, it is mostly U.S. importers and consumers who absorb those higher costs in the form of lower profits (businesses) and/or higher retail (consumers).Look no further than last year’s 12% increase in washing machines/dryer prices as a case study for the prospective impact of the new, higher tariffs.

Unintended Consequences

Every action has an equal and opposite reaction. 2018 saw the Chinese Yuan decline over 9% against the U.S. Dollar after President Trump imposed tariffs on Chinese products.These currency moves essentially negated the effects of U.S. tariffs on Chinese exporters by making their goods cheaper after the U.S. tariffs made them more expensive.

But a currency war is a rather benign reaction to a trade war.Some historians point to rising tariffs as a contributing factor the U.S. Civil War. After all, Fort Sumter, the first flashpoint in the conflict, was a tariff collection point in Charleston Harbor! We can only hope and pray the trade dispute with China is resolved quickly and peacefully.

Investment Implications

A trade war could be bad news for U.S. retailers and consumers in the coming quarters.It could lead to a stronger dollar should the Fed be forced to battle inflation. A stronger dollar would, of course, hurt U.S. exporters, so we believe investors should be prepared for the possibility of higher headline inflation and slower earnings growth ahead. A positive resolution to the trade war would, of course, have the opposite effects in our view.

However, investors should be careful in how they prepare for inflation.Inflation in consumer goods coupled with slower growth is a recipe for stagflation.Indeed, industrial commodities such as copper and agricultural commodities like soy have experienced deflation since the trade war with China intensified in 2018.

Copper Price Change and US Soybean Price Change graph

Beneficiaries of a trade war might include high-quality bonds, Utilities, and Real Estate holdings. We are also keeping an eye on Mexico.Forbes recently noted that Mexico overtook China as our largest trading partner and both stock markets have outperformed Chinese equities over the past 12 months. We are pleased to report that we have been adding these positions to client portfolios over the past 6 months.

Have additional questions about this topic? Please feel free to reach out! 

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The information contained herein is not to be construed as a recommendation for a particular security to any individual person or entity. The decision to review or consider the purchase of any security mentioned in this article should not be undertaken without consideration of your personal financial information and risk tolerance with your financial professional. Past performance should not be considered as an indicator of future results.Securities offered through Triad Advisors, LLC. Member FINRA/SIPC. Investment advice offered through Goss Advisors, a registered investment adviser. Goss Advisors and the Deupree James Group are separate entities from Triad Advisors, LLC.

Securities offered through Triad Advisors