The trade war with China escalated quickly this week as President Donald Trump raised the stakes by announcing that his administration is going to levy tariffs on an additional $200 billion of Chinese imports (tariffs are already in place on $50 billion of Chinese imports), effective Sept. 24, and that it stands ready to impose tariffs on another $267 billion of imports if China retaliates.
Naturally, traders are wondering how they should navigate the markets and adjust their portfolios based on this news.
Our recommendation? Don’t worry too much about it for now … except in a few key instances.
Why Worry?
Increased tariffs and the trade war with China are big pieces of financial news, but they aren’t market-killers yet.
First of all, the threatened escalation of tariffs isn’t quite as severe as many had anticipated. Instead of the 25% tariff most analysts were expecting, the Trump administration announced it would only slap a 10% tariff on Chinese imports initially, with the potential of raising the tariff to 25% in 2019. This slow ramp-up will delay the impact that tariffs could have on the U.S. economy and shows the Trump administration is still open to negotiations.
While China did retaliate with increased tariffs of its own, it too showed it was interested in trying to work things out by cutting its tariff rates from 25% to 10% on some U.S. imports and from 10% to 5% on others.
This posturing between the two countries has many traders wondering if there is an opportunity for a meeting between President Trump and Chinese President Xi Jinping at the G20 meeting scheduled for Nov. 30. Were they to meet, the two leaders could announce a new trade agreement, or at least the intention of coming to an agreement.
Second, many traders are wondering what impact these tariffs are actually going to have on the broader U.S. economy. Sure, there are specific companies and industries — look no further than soybean farmers in the Midwest and U.S. auto manufacturers — that are feeling the direct impact of the tariffs that have already been imposed, and there will certainly be companies and industries that will feel the pinch from these new tariffs, but what will the broader impact be?
Goldman Sachs estimates Personal Consumption Expenditures (PCE) inflation will increase from 3 to 15 basis points (0.03%-0.15%) year-over-year depending on the total value of tariffs currently being threatened and that the impact on real Gross Domestic Product (GDP) growth in the U.S. would be minimal within the lower range of that estimate.
Industries to Watch During the Trade War
While the market in general may currently not be under bearish threat, it will be important to keep your eye on a few key industries based on the tariffs that are being imposed, or might be imposed, by the Trump administration. You can break the tariffs out into the following three rounds:
- Round 1 — the $50 billion in tariffs that are already in place
- Round 2 — the $200 billion in tariffs the Trump administration announced this week
- Round 3 — the $267 billion in tariffs that may yet be announced
The following industries are experiencing the most inflationary pressure from Round 1:
- Machinery
- Electrical equipment
The following industries are likely to experience the most inflationary pressure from Round 2:
- Computer equipment
- Furniture
- Auto parts
And the following industries are likely to experience the most inflationary pressure from Round 3, if it is ever implemented:
- Computer equipment
- Cell phones
- Apparel
- Toys
- Footwear
- TVs and monitors
The Bottom Line
As we’ve discussed before when looking at how Wall Street plays chicken, Wall Street waits until the last second before it flinches because it doesn’t want to destroy trillions of dollars of wealth in the stock market if it doesn’t have to.
Instead, we anticipate that traders will continue to climb the wall of worry (i.e. maintain the bullish momentum in the market by buying more stock regardless of potential future risks) as the trade war rhetoric ebbs and flows.
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InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news — and with an innovative “Bonus Income” program that lets you supplement your monthly income…WITHOUT waiting for a dividend check! Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
