As mentioned in my previous article in May, this trade dispute with China was inevitable and necessary to balance out the relational equation between America’s and China’s economies to become more equitable. When a party in any relationship perceives the relationship as unfair, then friction forms and measures must be taken to diffuse the “perceived violations.”
Over the weekend, China decided to weaken its currency to offset and counter the imposed American tariffs on its products. American tariffs increase the cost of Chinese products for the American buyer, and the weakening of China’s currency decreases the cost of Chinese products for the American buyer. Therefore, this move by China offsets much of the increased cost of tariffs (tax) for the American buyers. This will also dissuade manufacturing businesses considering to leave China for other low-cost labor areas so that they could avoid the tariffs imposed on Chinese products. Also, China decreasing its currency makes American products more expensive for the Chinese buyer—hence, China will import less American products. Do remember that America imports about $500 billion of Chinese products annually and China imports about $100 billion of American products annually.
What are the next moves? Well, we know that it is in both America’s and China’s interest to find a solution. The free market intertwines countries’ economies (aligning interests—a good thing!). Now, China has great investments in America and America has great investments in China—each greatly benefits when the other prospers. Therefore, posturing and positioning must occur before any agreement can happen, because each country wants to know the maximum deal they can achieve. America and China are the two LARGEST economies in the world—therefore, both sides will take great measures to achieve the best possible deal for themselves. America will probably increase tariffs to 25 percent on the remaining Chinese products, and then from this point, America and China should be at a more suitable climate to negotiate a quid pro quo agreement (as more extensively detailed in May’s article). A deal will eventually be agreed upon—it’s just a matter of when.
The Bottom Line:
The Market overacted this past Monday as it often does with any new information it cannot digest and fully understand—the market really dislikes unknown variables, and these actions are unknown variables. After the dust settles, we begin to understand and realize the course of actions each side is taking, and thus, the unknown variables become more known variables, which the market likes.
Remember: Market Value comes from businesses’ revenue and earnings (businesses producing products and services that people are buying). This is the gist of it all. And businesses’ revenue and earnings are continuing to increase in America in 2019—therefore, it makes senses that the market increases. Also, many forward economic indicators look positive based on the Conference Board’s LEI. However, the P/E ratio of the S&P 500 is a bit higher than the historical average so be prudent when investing. ¹ The P/E ratio is the Price of the Stock divided by the Earnings Per Share (basically, the P/E Ratio is a multiple of the company’s earnings or—in other words—how many times earnings the company is worth). As always, a properly diversified and managed portfolio will help you navigate the market terrain and minimize losses during downtimes. Please reach out for any questions or comments.
Thanks,
David
¹ https://www.multpl.com/s-p-500-pe-ratio