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Expect Little Stock Market Impact From A U.S.-China Trade War

Jason Kelly profile picture
Jason Kelly


  • The odds of a trade war may be escalating, given heated commentary and a rising level of desired tariffs from President Trump, and retorts from China.
  • However, no policy has passed. Even if it does pass, it’s likely to be temporary, small scale, and spread over a period of maneuvering, making sharp stock market damage unlikely.
  • I provide this perspective to counterbalance the prevailing narrative this weekend, which holds that an impending trade war is imperiling stock market profits. It’s probably not.

I agree with Fed Chairman Jerome Powell that it's too early to start talking about the consequences of a trade war that could take any shape from here on out. That would be the case in any trade war, but this one brewing with China presents particularly tricky forecasting challenges.

The reason is that China runs an enormous trade surplus with the United States, as referenced by President Trump in the following tweet last week: "We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the US. Now we have a trade deficit of $500B a year, with intellectual property theft of another $300B. We cannot let this continue!" In a separate tweet, he added: "When you're already $500B DOWN, you can't lose!"

In a trade war, the side with the deficit has a strategic advantage because it imports more from the rival. America imports so much more than China that there's far more room for America to maneuver by adding Chinese goods to its growing list of tariffed items.

Does this mean China would automatically lose a trade war with the US? No, and here's where it gets tricky. Because China would run out of products to counter-tariff, it would probably employ other ways of fighting back in a protracted trade war with the United States.

The first area most people like to go to when guessing what China would do is the bond market. Everybody knows by now that China holds billions of dollars worth of US Treasuries and is a major supporter of America's runaway spending problem. The argument goes that if China doesn't keep buying American Treasuries then the US will go bankrupt.

This is highly unlikely, in my view. It's too big.

This article was written by

Jason Kelly profile picture
The Kelly Letter rebalances to a growth target every quarter—no forecasting. This automated system beat the S&P 500 both pre- and post-pandemic. Its recovery from the March 2020 Covid crash made a fortune for subscribers. See the current performance chart at https://jasonkelly.com/

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

My Sig system is always invested in US stock and bond index funds. My portfolio allocation this weekend is 77% stocks and 23% bonds.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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