This week the trade dispute between China and the U.S. took a turn for the worse and with it sent the markets into volatility. Read on to see how this story and more could have an impact on the market.
Trade War Tensions with China Take a Turn for the Worse – the ongoing trade dispute between the U.S. and China continues to worsen, as both sides fired shots that sent markets into a volatile patch. The escalation started last week, when the U.S. announced it would impose 10% tariffs on $300 billion worth of Chinese imports, effective September 1. But the markets went into a tailspin on Monday when China retaliated by suspending purchases of U.S. agricultural products and allowing their currency, the yuan, to depreciate sharply against the dollar. The S&P 500 plummeted -3.3% on Monday and the tech-heavy Nasdaq – where many companies have China exposure – fell -3.8%.1 While a deepening of tensions between the world’s two biggest economies is far from ideal, the ‘trade war’ is also an old story that has been baking into asset prices for the better part of a year, in our view. While these escalations are new and unexpected, we would argue that the market’s expectations for a big deal have been falling for some time.
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Handling Volatility – What You Should Do!
Sudden market declines often result in emotional decision-making. For example, many investors rationalize that selling out of stocks is the surest way to avoid incurring further losses, but selling in many cases just locks those losses in.
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What Does Labeling China a “Currency Manipulator” Mean? For the first time since 1994, the United States has labeled China a currency manipulator following the near 2% depreciation of the yuan on Monday. China’s central bank claimed the devaluation was due to market forces and that it would not engage in a currency war. In reality, one could argue that China was manipulating its currency for long periods from around 2003 – 2013, but the case is weaker today to label China a currency manipulator. A recent International Monetary Fund report released in July found China’s currency was roughly in line with where it should be.3 From here, China will need to negotiate with the United States and the International Monetary Fund to make its currency more fairly valued, but the question remains how far these negotiations will go and what the end result will be. A weaker Chinese currency hurts American exporters who sell to China and weakens the effect of tariffs since Chinese imports are technically cheaper with a stronger dollar purchasing them.
The Fed Plans to Roll Out Faster Payment Systems – in a world where PayPal and Venmo allow customers to send money to each other instantly through a phone app, there is demand for banks of all sizes to have the same capabilities for dealing with clients and customers. The Federal Reserve voted this week 4-1 to build the infrastructure needed to make that happen, which it says should be ready by 2023–024. The payments system would allow bill payments, paychecks, and other transfers to happen instantly and be available 24 hours a day, which is vastly different from the current system (closed on weekends and takes 2-3 days for a transaction to settle). Many big banks have already started creating these systems, so the Fed’s system is likely to be used by smaller, regional, and community banks.4
How to React to Recent Volatility? One challenge that many equity investors are facing and will most likely continue to face throughout the remainder of the year is how to react to current volatility. In our view, it is important to remember that volatility is a normal part of the ebb and flow of the markets. We believe the key is not to look for ways to eliminate it, but to develop a mental approach to dealing with it.
Our Volatility guide, “Helping You Manage Market Volatility,”5 will provide you with insights and tips to do just that. Get answers to questions like:
If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!
Disclosure