Stocks Cool as Trade Fears Reheat

By: Craig Fehr, CFA August 05, 2019

Trade tensions between the U.S. and China once again took a leading role on Monday (Aug. 5), and as has frequently been the case over the past year, escalating tariff fears spooked the stock market. The S&P 500 fell nearly 3%, and the Dow dropped more than 700 points.

Investors have watched this movie before, but markets haven't become desensitized to the drama. We doubt the suspense will disappear, but the supporting cast of the broader investment story is still fairly healthy, extending this bull market's running time.

A Look at the Bigger Picture

Monday was the worst day for stocks in 2019, but we believe the bigger picture is still bright: Heading into last week, the stock market was having its best year since 2013. Consider the following takeaways:

  • Higher anxiety and a lower yuan – Market volatility in response to trade tensions is nothing new, but Monday's weakness was stirred by concerns over the latest retaliatory measures between the U.S. and China, stoking fears that global economic growth will suffer if the world's two largest economies can't reach some sort of trade deal. Last week, the Trump administration announced a 10% tariff on $300 billion worth of imports from China that would go into effect Sept. 1. This round of tariffs would largely hit consumer goods (such as apparel, electronics and phones), which may have exacerbated the market's reaction given the U.S. consumer has been the brightest star in the U.S. economy's ensemble.

    Additionally, Monday's market reaction was stoked by a sharp drop in the value of China's currency (the yuan), under the view that China's policymakers are allowing their currency to drop as a retaliatory response to the new tariffs because a weaker yuan makes Chinese imports cheaper and U.S. exports relatively more expensive.

  • Bumps, not a breakdown – This latest installment in the tariff saga is an additional signal that a full resolution to the trade spat isn't imminent. We've seen fits and starts like this over the past year, with a mix of retaliatory measures and constructive negotiations:
    • In August 2015, Chinese policymakers devalued the yuan, which, coupled with concerns of tighter Federal Reserve interest rate policy, sparked a 1,000-point decline in the Dow, initiating a 10% pullback in the stock market. One year later, the market had risen by 16%.
    • More recently, in May of this year, rising tariff threats and fears of a trade war prompted a 7% pullback. Even with the Aug. 5 decline, the stock market is still 4% higher since then.
  • A wider view is always useful – Market declines are always challenging, but investing for your long-term goals requires a broad perspective. Even with today's drop, the S&P 500 is just 6% below its all-time high, and U.S. stocks are up 15% in 2019 and 38% over the past three years. Moreover, well-diversified portfolios can be less susceptible to these short-term swings, with bond investments rising as stocks have pulled back.
  • Trade concerns are just one risk in today's investment landscape – a list that includes Brexit, slower global growth and monetary policy uncertainties. But with the positive side of the ledger still featuring 1) sustained economic expansion, 2) modestly rising corporate profits and 3) still-low interest rates, we think the outlook for longer-term investors remains favorable.

Important Information:

Past performance of the markets is not an indication of what will happen in the future.

Diversification does not ensure a profit or protect against a loss in a declining market.

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