Market Reaction Signals China Has More to Lose from Prolonged Trade WarLast month, Warren Buffett said investors shouldn’t overreact to the back-and-forth trade retaliation announcements between the U.S. and China. Additionally, on Tuesday, several of the most successful investors in the world predicted the two economic superpowers will eventually reach a deal after some short-term sabre rattling.
Just one day after President Trump fueled a massive global stock market sell-off with his threat of additional tariffs against China, bargain hunters have returned to the U.S. stock markets. Sure investors are still on-edge and volatility is at heightened risk levels, but the price action in the U.S. indexes suggests that there are varying degrees of risk due to the possibility of additional tariffs.
The price action in the U.S. markets suggests NASDAQ stocks are the least vulnerable to a possible trade war, while the Dow is the most vulnerable.
Additionally, one can also draw the conclusion that China’s economy faces more headwinds than the U.S. economy if additional tariffs are imposed. Just take a look at the performance in China’s stock market and the Yuan on Tuesday then compare that to the U.S. market and the performance by the U.S. Dollar.
While both the U.S. and Chinese economies are likely to suffer from a prolonged trade war, it looks as if China may be forced to make concessions if Chinese stocks and the Yuan continue to tumble.
As of Wednesday morning, the NASDAQ Composite remains in a position to post a new high for the year, while the Chinese stock market is hovering near its low for the year. This suggests that China is going after the wrong markets when threatening retaliation against the U.S.
If China really wanted to hurt the U.S. economy then perhaps they should go after U.S. technology. But will they dare to be so bold given how much their economy relies on U.S. business?
Trump picked the right time to start the tariffs. The U.S. economy is rolling on all cylinders while the Chinese economy is flat to weak. Based on this assessment, the U.S. should be able to continue to press China without significantly derailing economic growth. This likely means China will eventually cave to U.S. demands.
Buffett Responds to Trade War Fears
Last month, Warren Buffett said investors shouldn’t overreact to the back-and-forth trade retaliation announcements between the U.S. and China. Additionally, on Tuesday, several of the most successful investors in the world predicted the two economic superpowers will eventually reach a deal after some short-term sabre rattling.
Buffett said, “I don’t think either country will dig themselves into something that precipitates and continues any kind of a real trade war.”
“There will be some back and forth, but in the end I don’t think we’ll come out with a terrible answer on it … Trade benefits are huge and the world’s dependent on it in a major way for tis progress that two intelligent countries won’t do something extremely foolish. “
I prefer to follow the advice of Warren Buffett who has “skin in the game” then the talking heads on TV or the politicians who have a hidden agenda.