Last week, market volatility spiked amid heightened focus on U.S.-China trade relations. Risk assets had been trending higher through much of 2019, but higher U.S. tariffs on Chinese goods and increased skepticism about negotiation prospects going forward weighed on markets. Ahead of the Chinese delegation arrival in Washington, U.S. officials indicated China was backtracking on certain pledges from previous negotiations. President Trump threatened and later followed through on increased tariffs from 10 percent to 25 percent on $200 billion of Chinese goods.
While China denied the backtracking accusations, the news jolted markets. The S&P 500 was down 1.4 percent for the week at Thursday’s close. The tone modestly reversed on Friday following some optimistic comments out of the U.S. leaders, driving some positive investor sentiment.
China retaliated with intentions to raise tariffs on $60 billion of U.S. goods beginning June 1. Despite optimism that officials on both sides would reach a deal, the latest round of brinksmanship demonstrates just how far apart both sides remain after more than one year of negotiations. Investors must be patient as headlines and soundbites spur volatility in the short-term.
The longer-term market impact is difficult to predict given the fluidity of the situation. While U.S. companies may have been able to weather impacts of a 10 percent tariff, a jump to 25 percent could have more severe implications. We could start to see some weakness in U.S. supply chains that rely heavily on Chinese imports. Similarly, the U.S. is a large agricultural exporter to China, so a retaliatory measure targeting these goods could harm U.S. farmers. That said, it takes time for new trade policies to flow through economic channels, and we will certainly keep a close eye on the data as the trade story evolves.
JOYN continues to believe that investors should be patient and adhere to a well-constructed, diversified investment portfolio anchored to your goals and time horizon. Despite elevated uncertainty, there is no current justification to override our asset allocation methodology.