After tumbling nearly 2.5% on May 13th—the fallout from a series of tweets by President Donald Trump to escalate tariffs in the U.S.–China trade war—U.S. markets had mostly recovered in the week that followed.
An executive order to ban Chinese technology giant Huawei from the U.S. added more uncertainty the following week.
The market is correct to be worried about the effects of an all-out Sino-U.S. trade war—but know that real data, not social media, drives our investment decisions.
Why I don't try to decode the U.S. presidential tweetosphere
We've seen calm on other fronts in presidential trade battles: On Friday, May 17th, the U.S. lifted tariffs on metals imported from Canada and Mexico. It also delayed imposing tariffs, by six months, on autos imported from the European Union and Japan.
From the moment Trump was confirmed as a candidate in 2016, to his latest round of “Tariff Man" talk on Twitter, I've been regularly asked how the market would react to his presidency.
Then, and now, I'm adamant that what's important is policy and how it impacts the economy. Everything else is meaningless noise, whether negotiating tactic or threat.
The firings and other antics inside the White House through 2017 were concerning. As were the Twitter taunts against North Korea's “Little Rocket Man" over use of nuclear weapons. Yet, looking back to that year, new policies proved good for the markets and for U.S. equities in particular.
Trade tactics seem designed to seed doubts
Heading into 2018, President Trump took aim against the North American Free Trade Agreement. Until the midnight hour deadline of October 1st, the level of drama to negotiate a deal was extremely high.
Tweets suggested a real possibility that a new NAFTA, the United States Mexico Canada Agreement (USMCA), would not be signed. Given that uncertainty, that late in the year, many Canadian corporations delayed their investments—a factor that contributed to weaker data over the fourth quarter of 2018, and into the first quarter of 2019.
It can take months for renewed corporate investment to be reflected in economic data, and that's exactly what we've seen with the 100,000+ jobs created in Canada this past April.
Set your twitter calendar for the G20
Now that the U.S. trade focus is clearly on China, we have to realistically put things into perspective with regards to the global economy.
The U.S imported more than US$500 billion in goods from China in 2018. That's a big number, yet only about 3.5% of China's GDP. China has also been significantly stimulating its economy over the past year. Thus, global growth is unlikely to fall off a cliff over the next 12 months.
On the other side, tightening financial conditions and deteriorating confidence could pose greater risk to U.S. growth.
The U.S. has set out a schedule to increase tariffs on the rest of its Chinese imports over the next month. The timing neatly aligns with the start of the G20 Summit at the end of June, when Presidents Xi Jinping and Trump are expected to meet in Osaka.
Logic would support a deal. Yet, I know logic doesn't always prevail in politics, and we are talking about a very unconventional president in Trump.
Investing by numbers, not hashtags
We still see a growing economy, profitable corporations and a low interest rate environment for the foreseeable future. For these reasons, we remain overweight equities.
While we are tactically underweight investments in emerging markets, we still expect returns for the next 10 years to be fairly good, and are still forecasting superior economic growth for those markets.
Amid the daily drama of Twitter-fired trade talks, it's important to act on the facts. The U.S. and China, the world's two largest economies, have been on a collision course for some time—that's no surprise to us. More unexpected is how the row is being played out, both in hyperbole and in the public eye.
If you have concerns about how U.S.–China trade may affect your own portfolio, please count on your MD Advisor for a fact-based reality check.
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