The S&P 500 stock index fell 69.53 points to 2811.87 today (on Monday, May 13), or -2.41%. The Dow Jones Industrial Average dropped 617.38 points to 25324.99 or -2.38%. Bond yields fell as investors bid up the price of bonds. The 10-year U.S. Treasury Note is now yielding 2.41% compared to 2.46% at the end of last week.
An escalating trade war with China is the latest headwind to an otherwise fairly robust economy. Unlike previous tariff announcements, President Trump pointed out that the new tariffs don’t apply to goods currently in transit to the U.S., only those that are shipped after Friday. This may be a way to buy negotiators more time to strike a deal before higher tariffs actually kick in.
From an economic standpoint, U.S. exports to China account for only about 1% of our output. So even a complete ban on U.S. imports coming in to China would not impact U.S. economic growth very much. On the flip side, Friday’s increase in the U.S. tariff rate on $200 billion of Chinese imports will raise the price that U.S. consumers pay for anything manufactured in China.
The difficulty for U.S. companies will be how much of the increased cost to pass on to consumers. If all of the tariff is passed on to consumers, the price of most electronic goods will rise and demand will fall, resulting in lower sales. If companies absorb the tariff increase, consumers will still buy electronics, but profit margins will fall. Either way, many technology companies will see lower earnings, either from reduced sales, or lower profit margins. This is why the stock market fell today.
Our view is that while tensions with China may remain elevated for quite some time, the trade war will eventually be resolved. Neither the U.S. nor China will benefit from a protracted dispute. As an example, America is currently upgrading its cellular infrastructure to 5G, a technology that is 100 times faster than the current 4G network. The demand for devices and microchips is not falling. Instead, it is growing rapidly.
We do not believe clients should make any sudden changes to their investment strategy. If your current investment mix of stocks and bonds was established based on a long-term outlook, then short-term events like trade disputes should not change that.
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