Who will swerve first? What if nobody chooses to swerve? Is a direct collision possible?
The US and China are going head-to-head in a trade war right now. Each side has decided they’re getting the short end of the stick and are taking the fight to the streets to decide who has more fortitude. Who will win? Who will take the prize? Wait, is it possible there is no clear winner, just two losers?
Our Evergreen Wealth Management investment guru, Steve Hanley, has been studying this trade war and pointed out the game-of-chicken metaphor. In this game, somebody has to flinch and swerve or both parties collide, causing carnage. And the carnage, in this case, isn’t just to themselves, it’s to all of us, stakeholders in the great US economy. So we watch with great anticipation as the powers that be rattle their sabers with the desired outcome being more favorable trade terms for our side. And they for their side.
As you may have noticed, the market has been keeping watch as well. Because the results of this game-of-chicken trade war mean real consequences for the US economy, the Chinese economy, and the greater world economy, investors are trying to size-up the odds of any particular outcome. After all, the US and China trade A LOT with each other. Therefore, this matters A LOT.
So while we consider which side will win this epic game of chicken, it’s also possible that neither side relents and we do in fact, collide. Consider that the current president and his administration are seeking reelection in 2020 and would very much prefer a thriving economy at that time. The Chinese are very much aware of this and therefore have this as a serious chip with which to bargain. “Hey, we know you need this deal to get done, so we’ll dictate the terms” they can say. In other words, we don’t need to swerve, you do.
The stock market hates one thing more than anything else, and that’s uncertainty. If uncertainty exists, then investors don’t know quite how to invest so they just won’t. They’ll wait until the coast is clear and the rules are well understood. Because of that, we’ll likely see quite a bit of fluctuation in the values in the markets. Please prepare yourself for that. Given enough time (years maybe), the results of whatever deal is struck will become the new normal and business as usual will resume. Until that new normal is defined, investors will be struggling to find footing.
Before you choose to opt-out of the market altogether, consider that any deal that resolves this may result in the markets continuing to march onward and upward. In the meantime, people will continue to go to work every day, companies will continue to innovate, and markets will march forward…eventually. If you bail, you may miss some of the best days the market has to offer. You’ll also be wise to continue to own big US companies that have strong earnings overseas. That way you can be on both sides of the trade war, which may help to sustain you until the war is over. Either way, the dividend and interest income earned through these big company investments will provide you a nice income stream to live on without concern for the temporary up-and-down value of your portfolio.
So unless you have a direct line to the world’s leaders, we’ll just have to see how this game of chicken plays out. Let’s hope for an outcome that places the greater good ahead of ego and pride. Then again, this is politics we’re talking about here; we may all be in for big surprises.
All the best,
Adam Cufr, RICP®