The ongoing trade disputes with China have been a dominating factor for tariffs and investment markets this year. When trade tensions are at their highest, stocks usually decline. When there’s a lull in the trade-related news, investors regain confidence and stocks climb again.
While a volatile trade situation can impact the economy, the actual effect is not as much as what most investors believe it to be. In fact, trade with China makes up a relatively small portion of the economy.
Investors who are concerned about new tariffs should consider the following trade facts before making their next big stock decision.
1: Trade is Not a Leader in GDP
Consumer spending is the highest component of Gross Domestic Product. Trade makes up less than 15% of the total GDP. Even as trade disputes intensify, the impact will be minimized to highly specific industries that are targeted by Chinese tariffs. The damage to these companies will be very real and, in some cases, devastating for individual businesses. However, the economy at large will survive.
2: Tariffs Won’t Necessarily Change Demand
As both countries apply tariffs, corporations still need components and products, and consumers are still buying with a high level of confidence. As it stands now, tariffs have not impacted consumer and B2B demand.
Tariffs create fear, but the actual economic impact is usually much smaller than the headlines suggest.
3: U.S. Markets are More Resilient Than China’s
Even though markets can slip on days when there is big trade news, the impact is not widespread or prolonged. On Monday this week, the White House made an announcement that it would be taxing up to $200 Billion of Chinese products coming into the United States. The SPX index fell by less than 0.60%. In all likelihood, that loss will be regained in the week of trading.
The U.S. stock market is far more resilient than the Chinese equivalent. Chinese stocks are frequently falling, while indexes in America have only grown year to date.
Don’t Make Investment Decisions Based Solely on Tariffs
Tariffs and overall market confidence can be an important consideration when making investments. However, there are more important factors. Company performance, financials, key changes in leadership, industry conditions, and recent stock performance should all be used to inform investment decisions.
The tensions between China and the United States will likely continue beyond 2018. For investors, this should not be something that dominates buy and sell decisions. Doing so would expose too much risk while putting too much weight on a factor that has little real influence on most American businesses.
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