May 2019 – Trade Wars and Your Portfolio

The stock market has tumbled in response to ongoing tension over U.S.-China trade relations. The market is forward-looking and has reacted quickly to the impact of recently imposed tariffs and news of possible trade developments.

In March AIER’s staff economist examined the trade war’s first year. They estimated that new tariffs by the U.S. government from U.S. businesses would carry an annual bill of $45 billion. The President has since followed through on his threat to increase tariffs on a long list of Chinese imports from 10 percent to 25 percent, raising the estimated annual tax bill on U.S. businesses to $75 billion. This is approximately the same amount saved by Americans as a result of the 2017 income tax cuts, which contributed significantly to one of the strongest bull markets in recent history.
The incentives for a trade deal that benefits both nations are strong, but that outcome is not certain. So it remains to be seen how the trade war will ultimately impact global capital markets. We simply don’t know — but neither does anyone else. We are confident however that the market itself will quickly reflect new developments, so investors who hope to successfully time the market based on trade-related news (or any other news) are simply rolling the dice.

If no resolution is reached and further trade barriers are erected, investors will likely endure further pain; a lengthy bear market may well ensue. On one hand investors can simply bear this risk by maintaining exposure to global stock markets consistent with their target allocations, rebalancing among asset classes in disciplined fashion as we have described. Those considering the alternative of reducing their equity exposure must also successfully reverse course by resuming their equity allocation before the market rebounds. We are confident the former strategy provides a far superior risk-return trade-off.

Also in This Issue:

Location, Location, Location
Persistent Confusion: Broker-Dealers vs. Investment Advisers
The Uncommon Average
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Recommended Investment Vehicles

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