Stick to Plan as the United States Trumps Mexico and China

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There are concerns with the accelerating trade disputes among our two largest sources of imported goods ($346 billion and $540 billion from Mexico and China, respectively). Despite the scary headlines, the Global Perspectives investment philosophy is unequivocally “fundamentals drive markets.” This trade posturing we would put into our bucket of “do not Washington-proof” your portfolio. This is a catch-all for anything political anywhere in the world, and it is simply gamesmanship. Let’s briefly review what is happening now:

• Recent tariffs on Mexican imports stem from an attempt to more tightly control immigration flows through the Southern border
• In terms of impact on GDP, inflation and other macro variables, the threatened tariffs on Mexico would be fairly small, at least initially
• The larger effect on the U.S. economy is more indirect, manifesting itself through financial markets and confidence rather than immediate hits to growth
• Following the tariff hike imposed upon China, the U.S. also established an export ban on Huawei, one of China’s most powerful technology companies
• As a result, top carriers in the UK and Japan are cutting supplies to China and multinational tech companies are suffering
• The Chinese government has retaliated by creating a blacklist of foreign companies, individuals and organizations that it says are “unreliable” and violate market rules

Despite these trade tensions and to date “empty threats,” U.S. exports and imports are near all-time highs. World economic growth has more than doubled since 2003 and by 50% over the last decade. S&P 500 corporate earnings hit a record high in 2018 and are on track to surpass that record by the end of 2019. Given this extremely positive health report on the world economy, the likelihood of minimal financial impact from the tariffs and low the probability they will become official legislation, we see the current situation as a “Storm before the Calm.”

Please review our 2019 Global Perspectives Forecast: The Storm before the Calm.

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