We are experiencing turbulent financial times. While there are some encouraging things going on, such as record-low unemployment and low inflation, there are many negatives. The trade war with China has been going on for more than a year, and it recently heated up.
President Donald Trump has slapped many tariffs on China, which has been unfair in its dealings with the United States for decades. China limits access to its domestic markets to our manufacturers, steals our technology, manipulates currency and subsidizes exports. It does not have to obey all of the environmental laws that our companies must follow.
Not surprisingly, the Chinese have responded by putting tariffs on our goods, stopped buying our agricultural products and other actions. The world economics are so complex; changing the exchange rate on money affects many different elements.
Originally, it was hoped that the trade war would be short-lived. This appears unlikely now. China is building relations with other countries. It is buying farm products from Central America and this will probably continue. The Chinese are taking steps to shore up their own economy, which has been struggling. They are improving infrastructure to be able to serve more of their own people.
Many U.S. companies have been working to establish manufacturing plants in countries other than China. We are working to replace customer loss because of the trade war. The world is changing and the final solution probably will not be visible for some time.
The world challenges are not just between the United States and China. Hong Kong is a major financial capital and there is an almost daily revolution between that region and China. There are huge quantities of Chinese troops right across the border. This could be a huge distraction to the world economy.
Brexit will be coming in about two months, and no one knows for sure what will happen. The United Kingdom could end up without trade agreements with most of Europe. This could be very negative to stock markets. When England voted to leave the European Union several years ago, our stock market reacted quickly. Now we are approaching a real action day.
There are many other things going on that could upset the apple cart. This is why we are seeing increased volatility in the stock market. Since the Dow hit a new high on July 15, it is down more than 1,000 points. We are seeing inverse yield curves on a regular occurrence. This is when long-term bond rates of interest are lower than short-term rates. You should earn a higher rate of interest if you tie up your money for a longer time.
This often signals that a recession is coming. Bond yields of less than 2% on 10-year government bonds are considered a recession indicator to some traders. This week, they hit 1.44%.
If investors are willing to lock up their money for this long, they are not very optimistic about long-term growth. Recent reports show spending is slowing down among the rich. This is considered a negative sign because they spend a larger portion of retail sales and this trend often filters down to lower income levels. Our economy is very consumer-driven.
Make sure that your portfolio is in concert with all of the uncertainty in the world economy. Corrections are part of every market cycle and there has not been one in the last decade. Consider your risk tolerance and timeline and act accordingly.
Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”
To submit columns on financial planning or investing, email Rick Shrum at firstname.lastname@example.org.