Recently, President Trump announced that his administration planned to apply tariffs on all imports of 25% for steel and 15% on aluminum. These wouldn’t target specific countries accused of malicious trade practices, but all countries. Leaders from around the globe condemned the moves and said they could impose their own tariffs on US goods. Investors feared the resulting tit for tat could result in a global trade war and markets declined on the news.
If large scale protectionist policies are implemented by the US and countries around the world what might be the impact on the stock and bond markets? In the short term we’ve seen it be a positive for bonds, as investors have sought out safe havens, and a negative for stocks. Over time the impact of a trade war could be severe on the economy. The drop in demand for US exports would hurt the US manufacturing sector and the US economy as a whole. It would likely result in low or negative GDP growth and an increase in inflation and could push the country towards a recession. In this scenario it’s likely that equities would fall more substantially and fixed income would hold up better.
When considering the impact of tariffs, having a long term perspective can be helpful. The below chart shows the performance for the global stock market and includes many events that have had negative impacts. Two events are relevant to this discussion, the Arab Oil embargo in the 70’s and Brexit in 2016. Both were significant events at the time, impacting global trade and caused a dip in the markets. However, you can see over time investors were rewarded by staying disciplined and remaining invested.
If a trade war does come to pass it likely will have a negative impact on stocks and a mixed impact on bonds in the short run, however by keeping a long term perspective and remaining disciplined investors can still use a diversified portfolio to accomplish their goals.
|Index Performance||Feb.||YTD||Trl 1 Yr|
|US Stock (Russell 3000)||-3.69%||1.39%||16.22%|
|Foreign Stock (FTSE AW ex US)||-4.64%||0.58%||21.84%|
|Total US Bond Mkt. (BarCap Aggregate)||-0.95%||-2.09%||0.51%|
|Short US Gov. Bonds (BarCap Gov 1-5 Yr)||-0.13%||-0.71%||-0.36%|
|Municipal Bonds (BarCap 1-10yr Muni)||-0.22%||-0.80%||1.22%|
|Cash (ICE ML 3Month T-Bill)||0.09%||0.21%||0.99%|