In January 2018, after lowering tax rates on incomes of citizens and enterprises, as well as a record low unemployment rate, the stock market jumped to record highs. At this time, the yield of Treasury bonds grew steadily, but all of these factors increased the prospect of rising inflation. However, then the desire of the US President to protect domestic producers from foreign competition, mainly Chinese companies, led to an increase in tariffs on certain types of industrial goods from China and a response from the second side, which was the beginning of these events.
Donald Trump’s statement about the increase in tariffs in trade relations with China caused a tightening of trade policy between the two countries and the mutual increase in tariffs on each other’s goods. This could not but affect the stock market, which came to life after the Fed’s statements about its intention to fight the signs of a trade war and its consequences.
Trade war and inflation can negatively affect the integration of the global economy, which the Federal Reserve System diligently cherishes. All factors of the indicated manifestations are likely to restrain the growth of stocks, as long as there is a threat of economic damage. Among experts there are concerns about the possibility of a new phase of the global economic downturn.
The impact that potential indicator movements could have back and forth led to one of the fastest stock jumps in history. Then, after high-speed slides, which offset most of the losses, there was a decrease, bringing the index to a minimum. The consequences of the trade war with China may hit some large American companies selling their products in China more than anywhere else in the world, including the United States. In addition, China is the largest supplier of many parts and components for the production of many American companies, so it will be more difficult for such companies to do business not only in China, but around the world.
At the same time, China will suffer much less from this trade war, since its markets are mostly well protected by local law, and a very small number of manufacturers are exporting their goods to the United States. On the other hand, many experts believe that a full-scale trade war is unlikely to take place, just President Trump has his own unique, rather tough negotiating style, and China is not the only major trading partner for the United States.
At the same time, even the threat of such a development of events may cause a decrease in activity in the stock markets. In addition, there is a threat of tightening monetary policy, which will certainly have a negative impact on investors. The most adverse consequences of a trade war may be a decrease in the degree of globalization due to the development of so-called economic nationalism, which can slow down the development of the world economy.
If the Federal Reserve starts taking tough measures, then in addition to the growing deficit and inflation, this will lead to a significant impact on bond prices. When interest rates rise strongly, investors will have to fundamentally revise their investment portfolios and the ratio of bonds to other securities. High-quality bonds also lose their profitability when stock prices fall.
Experts recommend that investors in the current situation reduce the share of stocks in their portfolios and carefully approach the question of choosing those who should be left there because of the high risk of tightening monetary policy and raising interest rates.
At the moment, not counting Treasury bonds, experts recommend investing in Asian technology companies, but not US securities. The technological markets of developing countries still have significant development potential, and the shares themselves are noticeably cheaper, moreover, these states are trying more to create favorable conditions in these markets.
Also pay attention to the stocks of companies producing consumer goods, financial services, utilities, telecommunications and commodity companies. This is all recommended despite the fact that investors are now better off reducing their portfolios. It is not enough to clarify the situation with the trade war and as a result of protectionism, it is not necessary to expand their portfolios.