The U.S. / China ‘trade spat’ was the main driver of the stock market turbulence last week.
The Trump administration issued tariffs (or, tax) on $50 billion of Chinese goods due to China's alleged theft of U.S. intellectual property. China has responded (so far) with tariffs on $3 billion of U.S. goods.
China has much more to lose in a trade war than the U.S. In 2017, China sold $505.6 billion of goods to the U.S. (4.2% of its economy) and we sold just $130.4 billion to China (0.7% of our economy), so China is more limited as to how much goods they can tax.
Because China currently benefits significantly more from our trade relationship, this spat is unlikely to develop into a full-blown trade war. With that said, China has some ability to push back by buying fewer soybeans from the U.S. and buying less from U.S companies, such as Boeing and Apple.
On a positive note, over the weekend, Treasury Secretary Steven Mnuchin said he was "cautiously hopeful" that a deal can be reached with China.
The other big economic news last week was the Federal Reserve (Fed), our nation’s central bank, will be raising short-term interest rates. While the rate hike was widely expected, Wall Street was looking for clues about the Fed's intentions on future rate hikes.
The Fed's interest rate projections suggested two more rate hikes in 2018, but Fed Chair Jerome Powell dismissed those forecasts and said he wasn't worried about inflation. This suggests the Fed will not be aggressive when raising rates this year. Simply Money Advisors still expects two more increases in 2018.
The shadow being cast from these trade tensions is unlikely to have a significant effect on the U.S. economy. It certainly increases potential stock market turbulence in the short run, which is why you should own a diversified mix of stocks and bonds.
The Simply Money Point
Until there is some clarity on this trade spat, it's possible that stock market turbulence will continue. In the long run, we believe a growing economy and increasing corporate profits should help stocks rise in value, which is good news for investors like you.