Is a trade war bad for stocks?

The short answer: Yes, the market might suffer

Question: The Trump administration’s trade war with China has officially started, and we seem to be on the brink of similar events with most of our key trading partners. Is this a positive or negative factor for U.S. stocks?

Answer: On the surface, it may seem like U.S. corporations would be a big winner of President Donald Trump’s tariffs. After all, if imported goods become more expensive, U.S.-made goods would become more competitive, and the companies that make them should sell more, right?

Well, not really.

For one thing, many U.S. companies do a substantial portion of their business overseas. Retaliatory tariffs could be devastating to these businesses’ international sales.

Furthermore, many U.S. manufacturers use foreign-made materials to make their products. As material costs rise due to tariffs, it makes production costs more expensive, and this will undoubtedly be passed to the consumer.

Finally, consumers could feel a sting. These rising prices could cause inflation to heat up, which would likely result in higher-than-expected interest rates for consumers.

The bottom line: A trade war will hurt international business, make products more expensive and could even make it more expensive to borrow money. That’s a bad recipe for stocks.