How to hedge a trade war
There's a new emerging threat to the global economy: Trump's tariffs. The U.S. is set to impose a 25% tariff on China and Mexico as of last Friday. American consumers will face the burden of increased costs far more than the exporting countries, even though is being misrepresented by the White House. This could set the stage for a drop in demand globally. Notably, oil futures plummeted 14% over the last two weeks, which is often used as a barometer for global demand. Although it's impossible to know what the full impact of this trade war will be, there are reasonable ways to insulate your portfolio from this risk.
Stock volatility was most notably seen in emerging markets, including China, as the iShares Emerging Markets ETF (EEM) was down 10% last week. The S&P 500 (SPY) fared much better, down only 2% over the same time period. Stocks reliant on Chinese manufacturing, like Foot Locker (FL), might continue to suffer from the new momentum to slow trade with China. A portfolio should be aware of these risks and reduce exposure to stocks solely dependant on Chinese manufacturing.
A well-diversified portfolio may have seen little change. Bonds have increased in value as the world sought safety in government-guaranteed assets. The iShares 20+ year Treasury Bond ETF (TLT) jumped 3% in value last week.
The U.S. House Republicans may be making a move to halt Trump’s attempt to impose tariffs against Mexico. If they’re successful, this will be the first time the party goes against this Presidency while also potentially stopping a significant economic threat. The White House acts willy nilly in its deal-making, offering Australia and a few other countries wavers on tariffs. Unfortunately, the market will continue to react to any future deal decided by the President. Former CEO of PIMCO Investments, Mohamed El-Erian, said, “The best that can be hoped for is a tentative ceasefire amid a threat of an all-out global trade war.”^1
At Eureka Wealth Management, I keep my clients informed of potential risks to their portfolio and strategize on methods for limiting risk exposure. I also help with retirement planning and insurance. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.
^1 Financial Times 6/4/19 “Traditional playbook for investors thwarted by messy politics”