Trade Tensions and the Market

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Source: U.S. Census. Figures in billions.

Uncertainty surrounding trade negotiations was a key source of market volatility in 2018. We expect trade tensions to eventually subside, increasing the attractiveness of international equities over the long term.

Trade is important to global growth – A quarter of the U.S. economy and over half of global growth are tied to trade. S&P 500 companies earn about 40% of their revenue from countries outside the U.S. Hence, equities as whole benefit from trade agreements, but international equities benefit more than U.S. equities because of how important trade is to global growth. For this reason, investors are closely watching trade tensions between the U.S. and its three largest trading partners (China, Mexico and Canada). Recent data suggests that new trade restrictions between the U.S. and China are having an effect on trade. As seen in the blue bars of the chart above, U.S. exports to China totaled $102.4 billion in the first 10 months of 2018. This represents a 1% year-over-year decline in exports, compared with a 13% increase in 2017, a year before new tariffs were announced.

Trade uncertainty adds to market volatility – While there have been some bright spots, trade negotiations between the U.S. and China are complex. Uneven progress toward a deal is likely to be accompanied by continued market volatility.

Trade agreements improve global growth – Despite some bumpiness ahead, we expect ongoing negotiations to lead to updated trade agreements and an eventual easing of trade restrictions between the U.S. and its other major trading partners. In our view, periodic bouts of market uncertainty have created opportunities for investors to add international equities and take advantage of modest global growth ahead. Developed- and emerging-market equities have better valuations than U.S. equities and represent good buying opportunities for long-term investors

Action for investors

We believe that investor concerns over trade conflicts are overly pessimistic, particularly for international equities, which are trading at a discount to U.S. equities and to their own history. Consider diversifying your portfolio by adding broad-based international equity investments to take advantage of attractive valuations and favorable long-run economic conditions.

Important Information:

Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal. Special risks are inherent to international and emerging-market investing, including those related to currency fluctuations and foreign political and economic events.

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