For now, 401(k)s not feeling much of a squeeze
But trade wars can take ‘a long time to play out,’ experts warn
Could President Donald Trump’s mounting trade war end up as the undoing of your 401(k)?
When it comes to tariffs, no matter your politics, the risk of owning stocks clearly has gone up. Growing uncertainties surrounding U.S. trade policies could lead to reduced profits for some companies, higher prices for consumers, job losses and at the worst extreme could bring on the next recession.
While tariffs protect weaker domestic industries from foreign competition, economists note that trade barriers in the long run can be harmful to growth. We’re already hearing warnings from automakers and others.
The good news: Many 401(k) plans aren’t feeling much of a pinch. It has been a relatively good summer for stocks. The Dow Jones industrial average closed at 24,753.09 on May 25, the Friday before Memorial Day. The Dow closed at 25,306.83 on July 30 – an increase of 553.74 points, or 2.2 percent. Overall, the Dow was up 2.4 percent for the year through Monday’s close after recovering from the rocky ride earlier in 2018. But don’t let the latest upswing fool you. “These trade wars can take a very long time to play out,” said Kyle Handley, assistant professor of business economics and public policy at the University of Michigan Ross School of Business.
Ups and downs will be the usual
It’s important to know that trade tensions, at a minimum, could cause everyday investors to see more up-and-down shifts in the value of their retirement savings and college savings plans.
Typical 401(k) investors turn to equity index funds that track the Standard & Poor’s 500 for some portion of their investments. On Tuesday, the S&P 500 was edging nearer to its record high of 2,872.87 set in January, thanks to strong earnings.
Many of those companies, of course, are global and could be affected by trade wars – including autos, heavy duty trucks and equipment and tech companies.
We don’t know how things will play out – whether cooler heads will prevail or if what seems like a temporary tactic turns into a showdown that leads to a slowdown.
It’s unlikely, experts say, that investors will see an immediate downturn in the U.S. economy and the broader stock market simply on trade talks.
Taking aim at China
Trump imposed a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports in June. In addition, the Trump administration put tariffs on $34 billion of Chinese goods as of July 6 – including machines for sorting fruit, whiskey, canned food for dogs or cats, apples and some small passenger cars.
China hit back with duties on U.S. goods, including soybeans and automobiles.
Stocks in some industries, such as autos, are feeling more pain earlier in the trade game, reflecting higher tariffs on steel and aluminum.
Last week, General Motors blamed increases in the costs of steel and aluminum, in part, for a 2.8 percent decline in its second-quarter profit, compared with the same period a year ago. GM also cut its profit outlook for the year.
Ford cut its 2018 profit forecast as a result of slumping sales, trade tariffs in China and its struggling busi- ness in Europe.
GM noted that it buys 90 percent of its steel in the United States. But U.S. steel prices are going up in reaction to the tariffs.
UM’s Handley said tariffs drive up the overall cost even if you don’t use imported steel.
The objective is to reduce supply from the rest of the world and enable domestic sellers to raise prices, he said.
U.S. steel companies aren’t engaging in price gouging when they raise prices after tariffs are placed on imports, Handley said. Instead, they likely faced small profit margins in the first place and they now have more breathing room to raise their own prices.
What tariffs are supposed to do
Trump said in a recent speech at the White House that the goal is to stop foreign steel makers from dumping low-cost steel in the United States, which has destroyed steel companies and destroyed jobs.
Ultimately, Trump said new steel plants in the United States will help bring down steel prices, as well.
But right now, higher steel prices are driving up expenses for steel-consuming manufacturers. Some companies could pass along the cost by raising prices for consumers, depending on competition. Many companies with less pricing power would see reduced profits.
Shaking up trade ecosystem
Investors seem to be putting the fear that a fullblown trade war could throw the country into a recession far on the back burner. After all, U.S. growth hit 4.1 percent in the second quarter, which Trump recently bragged about..
Robert Bilkie, president of Sigma Investment Counselors in Southfield, Michigan, said he believes that Trump’s mindset is to shake up the “world trading ecosystem” to promote fairer trade.
“I believe that he is right when he says that the United States has less to lose, on balance, than other trading partners,” Bilkie said. “Hence, he is confident in showing resolve.”
Other trading partners could prove to be willing to negotiate and reduce their tariffs on U.S. imports to prevent higher tariffs on their products, Bilkie said. He does not expect a long-lasting trade war ahead.