Market Sell-off all about Chinese TariffsThe market is selling off today in response to the Chinese trade negotiations. On Friday, the U.S. raised tariffs from 10% to 25% on $200 billion of Chinese goods and threatened new tariffs on more than $300 billion worth of remaining Chinese good imported to the U.S.
In response China announced that it would increase tariffs on approximately $60 billion worth of goods exported from the U.S. to China with the increase scheduled to go into effect on June 1st.
This turn of events came as somewhat of a surprise as it was recently believed that the only thing left to work out was the location of the signing ceremony for the new U.S. China trade pact. Would the ceremony be held in Washington, Mar-a-Lago or Bedminster, NJ?
What Happened: From the U.S. perspective, China was reneging on previously agreed to terms. China was no longer willing to commit to changing laws covering intellectual property, forced technology transfers and subsidies. China said that any enforcement would need to go through Chinese law-enforcement channels and could not be guaranteed. China appeared to be willing to change regulations but not laws.
China grew upset that the U.S. did not trust them at their word. The U.S. refused to remove already imposed tariffs at the time of any deal being signed, instead the U.S. would begin to remove tariffs when China actually carried through on its commitments. The U.S. also wanted China to agree not to retaliate if the U.S. felt that it needs to re-impose tariffs in the future.
The general market feeling was that a Chinese trade deal would be worked out sooner rather than later. These new developments have certainly increased the uncertainty of a deal and at the very least the timing of a deal. What economic damage will occur as a deal is being worked out and when will something get done? Larry Kudlow, the Director of the U.S. Economic Council, indicated that President Trump and President Xi are expected to meet at the next G-20, however, that is not scheduled until the end of June.
One must remember, traders and those creating algorithms are listening intently to every word coming out of the trade talks. It is important to remember these are high volume quick moving strategies not long-term investors. They move money in and out of the stock market at a pace which would make the Daytona 500 look like a Sunday drive in the country.
Long-term investors should take some comfort in the fact we are enjoying a surging economy, record corporate profits, the best jobs market ever, and a GDP which was nearly 40% better than forecast. In light of these recent developments, we continue to believe that a hedged-equity portfolio is a prudent strategy for most investors
looking to remain invested in equities. Please contact us with any concerns or comments.