Many parts of the country recently experienced a heat wave and with extreme temperatures, come the usual warnings: keep your pets indoors, don’t overdo physical activity and hydrate often. It just so happens, that the heat wave coincided with the implementation of U.S. and Chinese tariffs, which prompted some tea-leaf readers to come to a boil on the markets and exclaim “SELL EVERYTHING!” Before you take any action that would pre-empt your game plan, here’s a handy summertime hint: stay cool with your investments!
Let’s review the specific catalyst to the recent worries. U.S.-China trade tensions escalated, after the Trump Administration said that it would implement the previously announced 25 percent tariff on $50 billion of Chinese goods “that contain industrially significant technologies” – i.e., those that were highlighted in President Xi’s “Made in China 2025” project, which explicitly focuses on boosting China’s capabilities in sectors where the U.S. is currently a leader.
The list of products covered 1,102 goods, targeting specific Chinese industries including: aerospace, information and communications technology, robotics, industrial machinery, new materials, and automobiles. In turn, Beijing said it would impose 25 percent tariffs on a total of 659 U.S. goods worth $50 billion, including agricultural, automobile and “aquatic” (seafood) products. The first phase of both the U.S. and Chinese tariffs ($34 billion) went into effect on July 6th and the additional $16 billion will likely be implemented soon.
On July 10th, the Trump administration released a list of an additional $200 billion worth of Chinese imports that will be subject to a 10 percent tariff. The items could more directly impact consumers, because they include food products, shampoo and soap, handbags, gloves, digital cameras, television components and refrigerators. While no date has been set, the new round could go into effect as early as September.
Perhaps you are thinking, “How does this tariff stuff impact me?” The answer is that we don’t know yet. While the Chamber of Commerce said the tariffs would place the “cost of China’s unfair trade practices squarely on the shoulders of American consumers, manufacturers, farmers, and ranchers,” there’s also the possibility that if wholesale prices rise, those increases will not be passed onto consumers. For example, motorcycle maker Harley-Davidson said it would move some of its production overseas, rather than increase its prices. That said, Harley also noted that it would earn less money this year as a result of the tariffs.
Some investors are worried that the tariffs will negatively impact the global economy and as a result, stock prices of multi-national firms will come under pressure. But according to the analysts at Capital Economics, “both the U.S. and Chinese economies are predominantly domestically-focused. Neither will be brought to their knees by this trade dispute. But it could have the effect of throwing some grit into the economic gears,” which they estimate at less than a quart-point reduction in economic growth for both countries.
Of course that assessment is predicated on no further escalation of the trade conflict. The Trump Administration has said that it is reviewing another potential $200 billion worth of goods, which could prompt a Chinese reaction. You can see how all of this could get messy quickly, which has some investors trying to outsmart the news cycle and sell stocks now, before the tariff tiff becomes a more dangerous war.
To that, I repeat the advice I proffered earlier this year, when stock markets corrected: If you don’t need your money for at least five years, DO NOTHING. When it comes to heated rhetoric on trade and bumpy markets, your best bet is to stay cool, hydrate often and limit your investment activities.