Recent announcements from the US on the introduction of possible trade tariffs on Chinese goods have caused markets to fall on fears of a trade war between the US and China. We look at what this could mean and what to consider when markets are volatile.
What happened in the markets?
- On Thursday 22 March, President Trump signed a presidential memorandum outlining possible tariffs to be applied on Chinese goods.
- Global shares fell that day and on Friday (23 March) on fears of a trade war between the US and China. On Thursday the US Dow Jones index closed lower by 724 points or 2.9 per cent. The S&P 500 index fell by 2.5 per cent and the Nasdaq fell by 179 points or 1.8 per cent.
- On Friday the Australian ASX 200 fell by 2.2 per cent. And US shares fell further with the Dow lower by almost 425 points or 1.8 per cent with the S&P 500 down by 2.1 per cent and the Nasdaq down 2.4 per cent.
Background
- In August 2017, US President Donald Trump directed the United States Trade Representative to investigate whether “China’s laws, policies, practices, or actions” may be unreasonable or discriminatory and thus harming American “intellectual property rights, innovation, or technology development.” Hearings were held in October 2017.
- The investigation found that US companies were disadvantaged by Chinese trade practices and actions. As a result the US President has now directed the US Trade Representative, Robert Lighthizer, to take appropriate responses for the alleged actions that have been deemed unfair. Included are potential increases in tariffs on Chinese goods.
Global reaction
- The US Trade Representative now has to come up with a proposed list of products that will be subject to additional tariffs.
- When the list of proposed products is announced, then comments will be sought from the public over the following 30 days and then there will be a public hearing. So there is likely to be ample time for responses, both from US companies and consumers and Chinese interests.
- The Chinese commerce ministry issued a statement saying that Beijing “will certainly take all necessary measures to resolutely defend its legitimate rights and interests”.
Implications
- When elected, President Trump indicated that he would support US companies by taking action over “unfair trade practices” applied by other nations. So recent decisions on trade don’t come as a surprise.
- The US President wants to be seen as defending US interests; however a raft of companies, business organisations and economic and political advisers have argued against going too far with responses on trade issues.
- It should be noted that in response to the initial action by the US to apply tariffs on imported steel and aluminium, numerous countries have now been granted exemptions, including the European Union. So while the US has been vocal on trade issues, the real impact may prove to be more muted.
Understanding market volatility
By nature, stock markets can be volatile – which means they frequently move up and down. When there’s a fall in the stock market, it’s normal to have some concern about how this might affect your investments.
The effect on your long term financial objectives
When the market drops, you’re likely to notice a decrease in the returns you earn on your shares and a decline in the value of the shares themselves. This means that even if your investments fall in value in the short term, you can still expect them to be a successful investment over a period of 10 years or more. That’s why you need to keep sight of the bigger picture – particularly when you have a longer time frame for investing – and focus on how you’re tracking towards achieving your financial objectives.
It’s also important to remember that your exposure to these market events will depend on the make-up of your investments.
Talk to your financial adviser
Stock market movements are complicated, and may seem overwhelming to understand, but the important thing is to remain focus on your financial objectives and how you’re tracking towards achieving them. Your financial adviser can explain how any market changes will affect your personal situation and your long-term financial plan.
This market information has been provided by Craig James, Chief Economist, CommSec.