"Tariff Déjà Vu"
The stock market has begun to correct (yet again) with recent news from the White House for additional tariffs on Chinese goods. According to Reuters, once the new tariffs take effect on September 1st, 2019, virtually every import coming to the U.S. from China will have some sort of tariff on it. The current correction we are experiencing gives us Déjà vu of the correction back in May when trade discussions broke down and we saw an increase in tariffs.
Trade discussions between China and the U.S. have continued to intensify since initial tariffs were introduced in 2018. However, we have reached a new point in the trade war as China devalued their currency on August 5th. This triggered a response from the U.S., labeling China a currency manipulator, which has not been done since the early ‘90s. When a country devalues its currency, in this case the Yuan, it assists in propping up the export economy because:
- Exports become cheaper, which gives China an unfair advantage in world trade
- Offsets impact of higher tariffs that the U.S. has placed on China
Below is a timeline of the escalating tariffs that have been put in place and what will take effect on September 1st.
Theoretically, tariffs on imported goods and services will level the playing field in terms of prices for domestic producers. Ideally consumers would choose the domestic product over the imported product, which would assist the domestic economy by boosting GDP. In practice, this takes longer to accomplish as there are many moving factors beyond simply selecting products from domestic companies than importing it.
If tariffs are here to stay and trade talks continue to deteriorate, corporations who import goods and services from China will be forced to make a few decisions:
- Continue to import goods and services from China and accept the cost of tariffs internally (reducing margins) or pass along the cost in a price increase to consumers (potentially decreasing sales)
- Move imports of goods and services to another country that has lower costs and no tariffs (could take time to build relationships and potentially see regulatory issues)
- Buy all goods and services domestically (potentially cost more than importing)
The options that U.S. companies face take time and resources to implement. Further, the uncertainty of if or when a resolution will happen continue to create incremental headwinds for these companies and their stockholders.
As a result of the uncertainties of the trade situation, markets may continue to be in a more volatile state than usual. One of the ways to combat this volatility is to invest in low volatility stocks, which is the current holding of the Gradient Tactical Rotation (GTR) Portfolio. The rotation into the S&P 500 Low Volatility ETF (SPLV) in November of 2018 has proven to be an opportunistic rotation as the performance of the US low volatility sub sector has outperformed the overall market during that timeframe.