Advisor Voices

Advisor Voices: Certain Uncertainty

16 May 2019
Investment Strategist

A dozen years ago or so, when I worked for a major investment consultant, one of my colleagues criticized an investment team for not knowing what they did not know. I had to think about this for a long time, because how can you know something that you do not know? This notion has come back to me recently when thinking about the trade situation with China, because the eventual outcome is something I know that I do not know.

 President Trump’s May 5th increase in tariffs from 10% to 25% on $200 billion of goods came as a surprise to the markets, which had rallied considerably this year. The rally was, in part, due to optimism around a trade agreement. Those hopes were further dashed on May 13th, as China retaliated with tariffs as high as 25% on $60 billion in U.S. goods, sending global markets lower. Both sides have seemingly dug in their feet, with the U.S. saying it could impose a 25% tariff on the remaining $325 billion in Chinese exports.

The trade war has been a popular issue among voters/consumers.  However, the first $50 billion in tariffs did not directly affect consumer goods. The next $200 billion, which were first taxed at 10%, affected only 31% of consumer goods. Not only will consumers start to feel the effects of tariffs now that those will be taxed at 25%, but more than half of the remaining exports are consumer goods. How popular will tariffs be with voters when they go toy shopping this holiday season?

remaining U.S. imports from China

Source: Peterson Institute of International Economics

So what are the potential outcomes? One outcome could have the two sides take a step back, allowing Donald Trump and Xi Jinping to have a productive conversation at the G-20 meeting on June 28th. Another option could see trade negotiations continue to drag on or the trade war become more permanent. The later outcome would certainly be more damaging to China in terms of its effect on GDP since exports to the U.S. are more significant than our exports to them. However, higher tariffs will mean higher prices for U.S. consumers, which could affect spending and increase inflation. With uncertainty around consumer demand and supply chains, businesses may not invest as much in their companies, which could slow growth.

So what is certain? The trade wars have contributed to slower global growth and escalating them will only dampen global GDP further. The Chinese government has a long-term view (Xi has no term limits) and the ability to provide economic stimulus, while politicians in the U.S. will want their voters happy with the 2020 election year coming up. Neither side wants to appear to bend or see their economy break. Hopefully, the more optimistic outcome will prevail and the second half of the year can be trade-tension free. Will it?  I am certain that I do not know.

Past performance is no guarantee of future results. Opinions are as of the publication date, subject to change and may not come to pass. This is for informational purposes only and shouldn’t be considered investment advice.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Calamos Wealth Management LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.

Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Calamos Wealth Management, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/ her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Calamos Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. If you are a Calamos Wealth Management, LLC client, please remember to contact Calamos Wealth Management, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Calamos Wealth Management, LLC’s current written disclosure statement discussing our advisory services and fees is available upon request