Despite significant controversy surrounding the trade war between the US and China, which as the WSJ recently pointed out that China was the first to start, the economy will barely be affected by the recently announced tariffs. Currently, based on speculation and rhetoric, the trend appears to be towards negotiation rather than an outright trade war. Since it’s in no country’s interest to cease trading, it doesn’t look like that will occur. This is a geopolitical chess match rather than a war. The headlines and rumors of tariffs can spook the market in the short term, but over the medium term there’s no reason to expect major economic implications, unless sides do not reach compromises. When the stock market is at its all-time high it can be reasonable to sell first and ask questions later, but thus far there’s no reason to panic despite the modest correction already experienced.

The chart below compares the fiscal stimulus to the tariffs.

Tariffs Vs. Fiscal Stimulus

The fiscal policy effect is over 20 times that of tariffs assuming no more are announced. Stories of a potential trade war have largely been aimed at generating attention rather than explaining a serious crisis.

Coordinated Economic Slowing

The theme of 2017 was synchronized global economic growth. It’s silly to expect a cyclical economy which rarely stays consistent to remain on a strong growth pattern indefinitely, as we have previously discussed. Interestingly, when the U.S. stock market was hitting new record highs in January, the global economy was already decelerating. Some theorists believe in the efficient market hypothesis which is that the future results are always properly discounted in an asset. It means you can’t make a profit by doing analysis because everything is instantly priced in. That doesn’t seem to be plausible in this scenario as stocks dropped after growth slowed down. It’s tough to repeat this analysis and beat the benchmark, but the possibilities are certainly in the market to make money. As you can see from the chart below, the economic data is either getting worse or less good for the developed markets. Japan and Europe have recently seen the biggest negative shift.

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