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What Investors Should Know as Trade War Muddies Economic Outlook

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Trade wars muddying US economic outlook

Another factor impacting the US (SPY) growth outlook is the unfolding of the trade war between the US (SPY) (DIA) and China (FXI). The US has already imposed three rounds of tariffs on Chinese imports covering a total of $250 billion worth of imports, which have been met with tit-for-tat tariffs from China. The latest round of 10% tariffs on $200 billion of Chinese goods could go up to 25% at the beginning of 2019. Moreover, Trump has talked about bringing another $267 billion worth of Chinese imports under tariffs as well. The trade war is still a very big unknown and is expected to affect US businesses in unprecedented ways.

Direct impact

One of the direct impacts of tariffs on imports is in the downstream sector. The US auto sector (CARZ), for example, has made it quite clear how its fortunes are being affected by import tariffs on steel and aluminum. Ford (F) is expecting a hit of $1 billion to its earnings due to these tariffs. 3M (MMM) also expects a negative impact of ~$100 million from tariffs on its sourcing costs.

Impact on supply chains

Due to tariffs on Chinese goods and counter tariffs from China, the supply chains of many US multinationals have come under pressure. While the global supply chains were initially set up to minimize costs, with tariffs coming into play, those same cost improvements are drying up. US tech stocks (QQQ) (SMH) could be among the worst affected. Seven major US tech companies source more than half of their products from China.

The trade tariffs in 2018 have led to the strengthening of the US dollar (UUP), thereby impacting precious metals (GLD) (SLV) negatively. However, as tensions ramp up further, US growth could come under pressure, thereby impacting the dollar negatively. A weaker dollar along with an uncertain business environment would be positive for gold and other precious metals.

Apart from the trade war impact, rate hike expectations from the Fed are playing a major role in the performance of stocks as well as precious metals. In the next part, we’ll see how rate hikes could impact the assets going forward.

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