What to do about the trade wars

‘Communism has never come to power in a country that was not disrupted by war or corruption, or both.’ – John F. Kennedy

With Iran on a destabilization march across the Middle East, the continued loss of Europe to terrorist Islam, and up until a week ago – and no one really knows how it will play out – North Korean nuclear aspirations, who would have thought that the actual war to be fought will be a Trade war. With US President Trump firing serious tariff warning shots at China, the Europeans, Canadians and pretty much any other country the engages in trade with the US with the exception of Israel, it looks like the world may be heading for a major global trade war.

am a great fan of global trade as it provides a winwin situation for all involved. In a nutshell global trade helps enrich the entire world, far more than any distribution of wealth could ever achieve. That being said you can’t have a situation where one side “trades” for the express reason to steal all of your intellectual property. US Trade Representative Robert Lighthizer said the aim of the tariffs is the US response to “forced technology transfer and intellectual property theft by the Chinese.” Whole industries like soy bean producers and companies like General Motors, who make most of their annual sales to the Chinese have cause to worry, but everyone needs to look to the future. Best solution? As Betsy McCaughey, senior fellow at the London Center for Policy Research writes, “But if Beijing’s plan proceeds, warns the Council on Foreign Relations’s Lorand Laskai, these companies will be shut out of China in a decade, and will have to compete against Chinese companies that stole their technology and enjoy low-cost financing from Chinese state banks. Ouch.

“Are tariffs the best weapon against this plan? Trump is threatening a third tranche, bringing the total to $450 billion. China only imports $130b. worth of American goods, and won’t be able to keep up tit for tat. Advantage: America.”

I have been getting quite a few calls from clients worried about how this potential all-out trade war will impact their investment portfolios. They want to know if they should sell out their investment portfolio and sit in cash until this crisis passes. I always remind people that the world is usually a pretty crazy place with wars being fought in multiple countries, and plenty of political intrigue. The obsession with trying to impeach Trump I think qualifies as intrigue! As such, my advice is to do nothing.

Both readers of this column and listeners to my podcast will not be surprised by this advice. I always preach that panic is one of the worst things an investor can do. It’s important to stay the course and follow the investment plan that you have created. To repeat: The world has always been a very dangerous place; pundits have always been calling for market crashes, and most of the time they are wrong and the market moves higher.

What gets lost in all the dire forecasts of the impact of the trade war is what will actually happen to the economy. Most analysts predict that there will be a maximum of a 0.3-0.4% hit to GDP. While it’s not being reported much, the US economy is on pace to post second quarter GDP growth of nearly 5%! When was the last time that happened? Employment is at a record high, inflation is being held in check, wages are increasing let’s face it: the US is in the middle of an economic boom. Regardless of trade issues the US economy is very strong and corporations continue to post record profits.

The most telling aspect of all of this is that with each tariff announcement and counter-announcement global stocks haven’t dropped much at all. It’s important to note that historically market crashes generally happen without warning, and are not usually telegraphed.

If you are exposed to the stock market, then you need to be able to weather these crises because they come often and you need to focus on the long-term. If you are unable to do so, then quite frankly you have no business being in the stock market to begin with.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.