Investment Strategies as U.S.-China Trade Tensions Escalate

As of August 6th, 2019.  Beginning last Thursday, August 1st, the trade war between the United States and China escalated, with both sides taking new actions. This has led many indices to fall from the record highs achieved last month. As an example, the S&P 500 has posted approximately -6% from July 26th to yesterday, August 5th, with -3% coming yesterday.

The escalation began with President Trump announcing that the United States is implementing an additional tariff of 10% on $300 billion of Chinese imports starting September 1st. The Chinese government retaliated by asking its state-owned firms to suspend imports of U.S. agricultural products. In addition, the People’s Bank of China lowered the daily exchange rate range of the yuan to an 11-year low, approximately 7 yuan per dollar. This devaluation may have a ripple effect throughout the global economy as other nations may be pressured to follow suit and devalue their own currency to continue to be competitive with China. This specific rate is also politically sensitive and is seen as a “line in the sand,” as China has been accused of deliberately manipulating their currency by undervaluing the exchange rate to boost their exports. The People’s Bank of China(1,2) defended the currency devaluation by saying it was “due to the effects of unilateralist and trade-protectionist measures and the expectations for tariffs against China,” but that it does “not engage in competitive devaluation, and [does] not use the exchange rate for competitive purposes and [does] not use the exchange rate as a tool to deal with external disturbances such as trade disputes.” President Trump has decried this action as “currency manipulation.”

One of the hardest hit sectors from the trade war is the information technology sector due to exposure to China. China-sensitive tech stocks declined nearly 4% yesterday(3). We have been careful about weightings in the information technology sector as we believe there has been a bubble forming (only about 5%(4) of the U.S. GDP is information technology, but the S&P 500 is 22% information technology(5). This and the other risk management components in your portfolio may help reduce volatility from any continuing trade war. As you might recall from our last quarterly market write up published July 9th, 2019, we were not optimistic at that time that the trade differences would be resolved before the 2020 election.

As suitable, we have constructed portfolios with the intention to capture market upside (with records seen only weeks ago), while also incorporating down side protections (as suitable, underweighting technology, creating diversified portfolios, incorporating fixed income and alternative tools). We will continue to monitor market conditions and opportunities from the ever-evolving trade negotiations with China. If the prices for equities continue to drop ultimately hitting a “bargain” level, we would potentially see that as a buying opportunity. 

As always, please let us know your questions and comments. In the meantime, check out our free resources for wealth preservation & growthdivorce, and loss of a loved one.

- Michael

Definitions: 

S&P 500: Representing approximately 80% of the investable U.S. equity market, the S&P 500 measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested.

Footnotes:

  1. https://www.wsj.com/articles/chinas-yuan-falls-past-key-level-of-7-to-the-dollar-11564977948

  2. https://www.cnbc.com/2019/08/05/chinas-central-bank-denies-its-devaluing-countrys-currency-to-counter-tariffs.html

  3. https://www.marketwatch.com/story/dow-futures-down-more-than-300-points-as-us-china-trade-fight-deepens-2019-08-05

  4. https://www.statista.com/statistics/248004/percentage-added-to-the-us-gdp-by-industry/

  5. https://us.spindices.com/indices/equity/sp-500

Photo Credit:

President Trump & President Xi at G20 Leaders Summit. REUTERS/Kevin Lamarque/File Photo