Getting more comfortable with trade tensions
Author: Tony Genua
June 1, 2018
The latest tit-for-tat tariffs involving the U.S. and some of its key trading partners are a potential headwind for the global economy, but the risk of a full blown trade war remains a worst case scenario that is still largely avoidable.
Effective June 1, the U.S. will begin charging tariffs on Canadian, Mexican and European Union steel and aluminium after exemptions granted earlier in the year expired.
In retaliation, all three economies have proposed counter measures, including Canada’s intent to slap dollar-for-dollar tariffs on up to $16.6 billion worth of U.S. steel, aluminum, and other products beginning the first day in July.
Equity markets have been relatively nonplussed by this latest wrinkle in U.S. trade relations. The S&P 500 has rallied after initial weakness and the S&P/TSX Composite index has made gains as well. Some of the harder hit stocks, meanwhile, have included industrial companies that are heavy users of steel and aluminium in their products.
In our view, U.S. President Trump’s administration may be using tariffs as a tactic to encourage progress in trade talks with its allies. As a result, we believe a NAFTA deal – though unlikely this year – remains a possibility despite the current stalemate in negotiations.
Given this backdrop, investors should be prepared for more trade-related volatility on markets in the weeks ahead, but should also remember that strong economic conditions, unprecedented late-cycle fiscal stimulus and robust corporate earnings growth continue to be positive catalysts for stock prices.
In these uncertain types of environments, an active approach that takes advantage of opportunities as they arise makes most sense.