Stocks fell sharply on Monday (May 13) as China announced higher tariffs on $60 billion of imports from the U.S., retaliating for the U.S. tariff hikes imposed on May 10. Although China's higher tariffs won't go into effect until June 1, the U.S. is also considering raising tariffs on another $300 billion of Chinese imports.
Worries about the impacts of higher tariffs and heightened trade tensions weighed on stocks, with the Dow closing on Monday down 2.38% and the S&P 500 off 2.41%. In contrast, bond prices rose, helping buffer portfolios and lowering the rate on the 10-year U.S. Treasury bond to 2.40%.
After months of apparent progress toward reaching an agreement, last week's rift in the U.S.-China negotiations was unexpected. However, the issues involved are complex, and many still need to be resolved, so progress is likely to be slow and difficult. We continue to believe reaching a trade deal is in both countries' interests, but it is likely to take much longer than previously expected. Some of the reasons we believe both sides would like to reach an agreement include:
Removing the tariff increases could reverse the drop in U.S.-China trade over the past year, could combat slowing economic growth in both countries, and would be good news for the specific companies and sectors most affected (such as agriculture). In addition, we believe a resolution to U.S.-China trade tensions could be a catalyst for a rebound in global trade and better global growth.
A return to higher market volatility and elevated trade tensions hasn't altered the positive fundamentals of economic and earnings growth, still-low interest rates and fewer global disruptions that have supported rising stock prices this year. We think they'll continue to be the main drivers over time, but uncertainty remains high, and trade and tariff concerns may continue to prompt unexpected market moves.
That's why it's important to remember that your portfolio is designed to handle short-term ups and downs. Maintaining the mix of equities and fixed income that's appropriate for your long-term situation can keep you well prepared for more volatile markets ahead.
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