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Trade Wars: Is There Another Side to the Story?

What could the consensus be getting wrong when it comes to tariff concerns?

It is understandable that fears of a global trade war are rattling financial markets.  Given how much U.S. businesses have benefited from free trade and the globalization of labor markets and supply chains, tariffs have the potential to disrupt the global economy, at least over the shorter to medium term.  Even absent an actual trade war, the negative impact on business and consumer confidence from the fear of tariffs is a risk to the remaining longevity of the current economic cycle.

There are always risks and uncertainties when investing. Successful investing then is closely tied to our awareness of our emotions. Do we panic under fear and sell at the worst time, or pile on the greed and buy into market bubble?  Moreover, do we understand our own biases and how they can affect our decisions?  Is there, perhaps, a confirmation bias at work regarding our reaction to the threat of a trade war?  We don’t know for sure, but we must ask: What could the consensus be getting wrong when it comes to tariff concerns?

Consider: what are tariffs’ primary economic impact? Tariffs raise the price of imported goods. Ideally, this creates a pricing umbrella that allows domestic firms to raise prices and post higher profits if their own costs don’t escalate.

Consider: will the incremental slowdown due to tariffs in the U.S. economy be sufficient to slow growth below investors’ expectations. It’s certainly possible.  Although this month’s $34 billion of Chinese tariffs announced to match the U.S. imposed sanctions impact less than 2.5% of the U.S. economy.

Consider: how might tariffs affect the Fed’s policy of increasing interest rates?  The Fed may reach its goal of “normalized” interest rates sooner with tariffs and higher prices in effect.  They may not wish to continually hike rates in the face of a trade war and potentially slowing growth overseas. Rate hikes could pause, and not because of weakening U.S. growth.  This scenario would generally be bullish for markets.

The trade-war situation is likely prone to several more twists and turns before things become any clearer. The bottom line is that nobody knows how it will all play out.  Our training and experience says that the consensus gets it right: trade wars are a negative for markets and the economy.  However, it is just as possible that some or all the above scenarios do become real.  The point is to set your expectations for uncertainty, and remember there are always many sides to every story.

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Perritt Capital Management, Inc. is the registered investment advisor for Windgate Wealth Management accounts
All investments carry some level of risk, including the potential loss of principal invested.

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