By Matthew Gaude & Shawn McGuire
History shows us that our markets go through cycles and inflation increases at a steady rate. But sometimes current events throw a wrench into our economy, both domestically and globally, and wreak havoc on our portfolios and wallets. Whether it’s a major company announcing lower-than-expected earnings in any given quarter or political unrest in certain parts of the world, we’ve seen our market indices plunge at a moment’s notice.
Lately, the current event that’s been making all the financial headlines is the trade war with China. Here’s an overview of what’s happened so far and why it’s important for your money.
Trade Wars And China
First, let’s clear up the terminology. A trade war is defined as a situation in which countries try to damage each other’s trade. They do this by imposing tariffs or quota restrictions, which is exactly what the U.S. and China have been doing to each other since early 2018. For example, Country A decides to impose a tax, or tariff, on imports of cars from Country B. This makes it more expensive for Country B to sell their cars in Country A. Country B thinks this is unfair, so they try to level the playing field by imposing a tariff on one of the products that they import from Country A. And so it goes, back and forth, with each country making it harder, or more expensive, for the other country to sell them their goods.
The China trade war demonstrates this perfectly. Early this year, President Trump placed a 25% tariff on $250 billion of products we import from China on top of the tariffs the U.S. had already put on resources like steel and aluminum. China retaliated by raising tariffs on American-made goods. Then, on August 1st, Trump announced another 10% tariff on $300 billion of Chinese-made products to go into effect on September 1st. To break it down, this means that there will be a tax on essentially all Chinese goods imported to the U.S. As a result, the markets have reacted with each new twist in the situation and have gained or lost based on perceptions of how these events might pan out.
However, on August 13th, President Trump abruptly suspended plans to impose new tariffs on about $156 billion in goods from China, saying the move was driven by concerns about the impact escalating trade fight would have on businesses and consumers ahead of the holiday shopping season. Under the reprieve, the U.S. agreed to postpone until December 15th tariffs of 10% on smartphones (Apple), laptops, toys, videogames and other products that were set to take effect on September 1st.
Most recently, in response to Trump’s latest declarations, China made a bold move and devalued the yuan to the lowest level since the financial crisis of 2008, turning the trade war into a currency war. The end result? Stocks plummeted. It’s yet to be seen how far this war will go, but regardless, it will impact us as consumers.
How Does This Affect You?
The newly announced tariffs will impact your pocketbook. The first round of tariffs mainly focused on industrial goods, but this time consumer goods like clothing and electronics have been targeted. We already knew the bulk of our products come from China, but this political move by Trump makes it even more obvious how much we rely on this Asian powerhouse for much of our goods. We can expect prices to go up and options to go down. Using our car example from above, if a carmaker has to pay more for steel because of tariffs, they will pass at least some of the cost onto consumers, making cars more expensive or causing the company to lose sales. If quotas are enacted, there will be a limited supply of popular imports and consumers will have fewer options from which to choose.
And then there are your investments. One thing the markets hate is unpredictability, which is exactly what this trade war brings. This last round of tariff announcements came right on the heels of Trump and Chinese President Xi Jinping calling a truce on more tariffs in late June, surprising investors and causing a sell-off, causing multiple sectors to suffer. (1) We may see more volatility until a trade deal is agreed on.
The Chinese central bank denied that the yuan devaluation was meant as retaliation…
In response to the increased tariffs declared by President Trump, China devalued their currency (the yuan) to the lowest level since the financial crisis of 2008. As the WSJ noted, the Chinese government has acted to keep the yuan above the key 7 level for years. It’s unlikely the central bank would have the authority to reverse this policy without the permission – or direction – of top government officials.
Devaluing the yuan will lead to Chinese exports becoming more competitive or cheaper. This will in turn reduce the effects of additional tariffs imposed by the US on Chinese imports as part of the ongoing trade war. But the devaluing of currency will also make imports into China more expensive, increasing inflation in an already slowing economy.
The People’s Bank of China let the yuan weaken below the sensitive seven-to-one dollar level for the first time in more than a decade. Of course, this move is not without risks of its own…If the Chinese government allows the yuan to fall too far, too quickly, it could spook the markets and cause capital to flee the country.
This is exactly what happened three years ago, when a surprise yuan devaluation in August 2015 helped trigger a global panic that fall.
So…What Should You Do?
There is no real way to know what will happen politically or economically. It’s possible that Trump is only threatening China with these new tariffs to use them as a bargaining chip. But if China refuses to play along, they could become a reality. We expect this trade war to continue into the 2020 election as China may draw out negotiations to see who will become the next President.
At Live Oak Wealth Management, we understand the emotions involved in investing and dealing with tumultuous markets, so we work with you to build portfolios that are customized to your risk level and time horizon. If you have questions about trade wars or you’re concerned that your portfolio cannot handle the volatility that the current U.S.‒China trade spat has created, call our office at 770-552-5968 or email firstname.lastname@example.org. Or, if you prefer, you can simply click here to schedule an appointment online. We would love to answer your questions and help you prepare for whatever the future has in store.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insights and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
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