Stocks are not getting the new trading week off on the right foot, as concerns over the potential for a global trade war have once again resurfaced in a big way. On Friday, U.S. President Donald Trump announced tariffs on $50 billion of Chinese imports. In response, China said it would target high-value U.S. exports.
This tit-for-tat surrounding trade is seemingly putting the world’s two largest economies on a collision course that could result in an all-out trade war. Such a scenario could have significant consequences for the global economy and financial markets, and increasing tensions over trade could not come at a worse time.
China’s economy had gotten off to a solid start in 2018, and in many ways has acted as a buffer for global growth. The Chinese economy has, however, been showing some signs of slowing in recent data. Rising tensions over trade may exacerbate this slowdown, which policy-makers may be less likely to combat with previously seen stimulus measures. The result could potentially be a couple of pints shaved from each nation’s GDP this year and next. Perhaps more importantly, however, the uncertainty surrounding trade could damage investor and business confidence, slowing cross-border investment in the process.
Gold is trading not far from its lowest settlement of the year, and has remained range-bound for some time now. The metal’s lack of upside comes at a time when seemingly more and more analysts are sounding the alarm bells over increasingly high stock valuations, especially in high-flying tech names. Although stocks have shown a great deal of resiliency in recent months, investors have to be wondering just how much upside could be left in the tank.
Increasing economic and geopolitical headwinds are likely to become an increasingly significant factor in global financial markets in the weeks and months ahead. Accelerating inflation, trade tensions, higher oil and rising risks of recession may all weigh on economic activity and fuel and eventual reversal in global stocks and risk assets. Add to this the potential for a further and perhaps significant shakeup in the EU, and you have a recipe for trouble. You could make the argument that the risk/reward in stocks currently is not favorable, and now may be the time to consider diversifying away from equities.
Whether it comes next week, next month or next year, the next major stock market collapse could wipe out billions in shareholder value. Just as it did in the tech bubble of the early 2000s, and even during the financial crisis of 2008/2009, the onslaught could catch many unknowing investors off-guard, causing them significant declines in wealth that could take years, possibly even decades to recoup.
A great asset rotation could be seen in the months ahead. As investors become more skeptical over global growth and the geopolitical landscape, asset classes that have lagged could potentially outperform. Gold could stand to benefit greatly from such a scenario, and the next major, cyclical bull market in the metal may very well get started.