As trade negotiations with China have seemingly stalled, world stock markets have reacted negatively handing investors losses last week. As we start a new week and China retaliates with increased tariffs of their own, the markets are continuing to fall. While this drama continues to unfold, we point you to our analysis of the trade situation in our 2019 Market Outlook. We still believe that a deal with China will be reached, but not before more short-term pain is inflicted on investors.
Ultimately earnings and economic activity will dictate the direction of the markets. The US economy grew at a strong 3.2% in the first quarter of the year and while lingering trade tensions with China will assuredly constrain future economic activity, we still believe the US economy will grow this year, continuing our record economic expansion. The bottom line is to hold on and wait out the political posturing, a deal is in both countries’ best interests.
If the negotiations fail, then the impact of those additional tariffs could cost the U.S. one percent off the GDP forecast. This would be unfortunate, however, it should not risk tipping us into a recession, but pull GDP lower than 2%. The selloff in December appears to be pricing in no settlement in the trade negotiations. Should a deal be reached then I am sure there will be revisions to the upside on GDP growth and earnings expectations.
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