Tariffs and Trade Trigger Volatility

by: , Managing Director, Economist, and Portfolio Manager, New York Life Investment Management; Robert Serenbetz, Portfolio Strategist, MainStay Investments

The announcement of a 25% tariff on imported steel, and 10% on aluminum, caused fears of a trade war, triggering volatility. Tariffs will benefit domestic producers of steel and aluminum, but at the same time, they will hurt the many manufacturers using these materials – as well as consumers.

Higher steel and aluminum prices would increase costs in machinery, aerospace, auto, and construction. Still, overall, steel and aluminum only account for 1% of national income and 2% of total U.S. imports, so the direct impact on overall import prices is 50 bps.1

By itself, that’s not enough to derail the economy, but the key factor to watch is the risk of retaliation from trading partners. Previous examples of steel tariff hikes, in 2002 and 2016, did not trigger significant retaliation, but several countries have now issued statements threatening retaliation. This bears watching!

The White House has also signaled a new focus on “reciprocal” tariffs in areas where trading partners levy higher tariffs on U.S. products than the U.S. levies on the same imported goods. That would raise the cost of a wide range of imports from China, boost inflation, and potentially lead to retaliation against key U.S. exports.

Average Tariff Rates

Simple Average
Tariff Rate
Most Favored Nation (MFN)
Average Tariff Rate
United States of America 3.5 3.5
European Union 4.8 5.1
China 10.0 9.9
India 48.5 13.4

Source: World Trade Organization (WTO), as of December 30, 2017. A Most favored nation (MFN) is a tariff applied to a country with most favored nation status. An MFN tariff is the lowest possible tariff a country can assess on another country.

If a trade war were to happen, it would raise concerns about both inflation and the supply chains of large multi-national corporations. Investors should consider positions in companies with more revenue generated at home, such as small cap stocks, and commodity sensitive assets to hedge against the rising inflation risks.

1. Capital economics, as of March 1, 2018.

The information contained herein is general in nature and is provided solely for educational and informational purposes. New York Life does not provide legal, accounting, or tax advice. You should obtain advice specific to your circumstances from your own legal, accounting, and tax advisors.

Funds that invest in bonds are subject to interest-rate risk and could lose principal value when interest rates rise.  Bonds are also subject to credit risk, in which the bond issuer may fail to pay interest and principal in a timely manner.

 

All investments are subject to market risk, including possible loss of principal. Active investing is an investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity to exploit profitable conditions. Active management typically charges higher fees. Investing in smaller companies involves special risks, including higher volatility and lower liquidity. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market. Capital expenditure (CapEx) are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. It is often used to undertake new projects or investments by the firm.

The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

Most favored nation (MFN) is a tariff applied to a country with most favored nation status. An MFN tariff is the lowest possible tariff a country can assess on another country.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC.

1769074

Poul Kristensen, CFA

Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

Poul Kristensen, CFA is Managing Director, Economist, and Portfolio Manager with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group

Full Bio

Robert Serenbetz

Portfolio Strategist, MainStay Investments

Robert Serenbetz is the Portfolio Strategist for the Strategic Asset Allocation & Solutions Group (SAS). He contributes to investment thought leadership and communication efforts across New York Life Investment Management

Full Bio

Leave a Reply

Your e-mail address will not be published.