Wait and see! These three simple words plagued our childhoods. Hearing them was about as satisfying as their counterparts “because I said so” and “we’ll get there when we get there.” As with our childhoods, these three words are far from a satisfactory answer to how global trade conflict will resolve.
As of the writing of this commentary, the U.S. and Chinese presidents agreed to a temporary truce in an escalating trade war, plans to impose tariffs on Mexican imports have been called off (for now), while the Trump administration pivoted to pressuring Europe with tariffs in an effort to make their airline manufacturers less competitive.
At their most fundamental, these imposed tariffs and threats of further tariffs cause disruptions to the global economy. Even the uncertainty of whether further tariffs could be imposed forces corporations to adopt a “wait and see” attitude. While these are an annoyance to hear as a child, they are arguably the three most dangerous words in economics. For corporations to hold back on their normal business activities starts a cycle of uncertainty. Hiring slows. Investments in new product lines slow. Inventories decline. Each decision to withhold incrementally subtracts from the growth in the economy, while everyone looks around to see if the economy is slowing.
Will trade tariffs trigger the next recession?
We still see growth in the U.S. and global economy. The fundamentals of the market are still growing. Companies are still hiring. Earnings are still growing, albeit slowly. Manufacturers are still eking out growth despite uncertainty in their supply chains from China and Mexico. All said, the headwinds to global growth from trade are rustling different branches of the economy, but it’s a bend, not a break situation for future economic growth. We remain cautiously optimistic with the belief that growth is moderating and not dropping into recession.
That said, whether it is trade with China, the protests in Hong Kong, the posturing with Iran, or the ever-present struggle of the economic growth bulls versus recession bears, we plan for uncertainty in our clients’ portfolios. As stated above, we believe the trend of the global markets is still growth, albeit a little slower than we saw last year. The U.S. remains the global economic powerhouse. Developing countries like India, Mexico and China are all seeing continued trending increases in their middle class, a key driver of global economic growth. We are positioned for the long-term to take advantage of global growth in stocks while balancing for short-term pullbacks with a ballast of bonds.
What will be the outcome of all this trade action? In the short run, we will just have to wait and see. Longer term, we believe economic growth prevails over political posturing.
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