Recently, the stock market has been quite volatile. This is due to concerns about a potential trade war brewing between the US and China. But is that really a big deal?
In this article, we’ll look at the current situation and see how this could impact the market and the TSP.
The Trade Deficit
Since the 1980s, the US has had an increasing trade deficit with the rest of the world. As a result, it imports more goods than it exports. The current deficit is in the ballpark of $60 billion per month.
According to the Census Bureau, last year, the US exported about $1.5 trillion worth of goods and imported goods worth about $2.3 trillion. For 2017, the trade deficit was about $800 billion. The goods exported to China totaled to $130 billion, and those imported from China totaled to $505 billion; the trade deficit with China was $375 billion.
China alone constitutes almost half of the United State’s total trade deficit. This, to some extent, is because many companies outsource their manufacturing to China.
Basically, the US GDP is currently just shy of $20 trillion. This means that the $800 billion trade deficit represents about 4% of the economy. The trade deficit with China represents almost 2% of the US economy.
New Tariffs, Competing Interests
It’s logical for the US government to want to reign in this trade deficit especially since almost half of it is with one trade partner.
It’s also prudent for the US workers to want a lower trade deficit means that it will be cheaper for companies when they outsource for labor abroad. This can push down wages and increase the unemployment rate in America. However, it still makes sense that most companies would want to embrace globalization and outsource whenever possible. It means that they can save money, remain competitive, and supply their American consumers with goods at a cheaper price.
This year, the Trump administration started implementing tariffs on a variety of imports. Some of the affected items are:
• Since late January, 30% tariffs were implemented on imported solar panels and washing machines.
• Since early March, 25% tariffs were implemented on imported steel and 10% tariffs on aluminum.
• In late March, new tariffs were announced on $50 billion worth of Chinese imports.
This led to a decline in the Dow Jones Industrial Average by 724 points; the 5th largest daily decline in history.
• China announced 1525% on more than 100 items imported from the US. A few days later, additional tariffs were announced on another 100+ items.
Following China’s announcement, Trump proposed another round of tariffs on $100 billion of imports from China.
Investors are concerned that China owns about $1.2 trillion worth of America’s treasuries or more than 5% of the US federal debt. If China stopped buying these treasuries, this would result in higher interest rates for the US government debt. As a result, the broader bond market would be affected.
A Balanced Approach
According to JP Morgan, the S&P 500 is about 10% off its highs, and the forward price-to-earnings ratio is approximately 16.4x. The hyperactive market declines have at least, let some steam off of high US stock valuations.
If the trade relations sour badly, there is so much room for stock prices to decline. Holding a lifecycle fund or having exposure to all your TSP funds can significantly reduce the volatility of your portfolio.