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Podcast: Tariffs, Trade Wars, and the Threat to the Global Economy


  • Transcript


    [AUDIO INTRODUCTION] Welcome to the Bryn Mawr Trust Wealth Management podcast, providing commentary on what’s moving the financial markets, financial planning, and other timely business and monetary topics. Please welcome your host Jennifer Fox, president of BMT Wealth Management.

    [SPEAKER: JEN FOX] So I’m speaking today with Tony Natale, director of strategic research at BMT Wealth Management. Tony, welcome.

    [SPEAKER: TONY NATALE] Thanks, Jen.

    [SPEAKER: JEN FOX] So, Tony, concerns about tariffs and trade wars have been all over the news. I don’t think I can turn on the TV or turn on the radio without seeing something about the trade wars. And there’s definitely worry about what the impact will be to the global economy and the financial markets. What’s your assessment of the situation?

    [SPEAKER: TONY NATALE] I believe the Trump administration is concerned about rising trade deficits with some of America’s largest trading partners, mainly China. So if you look at the US balance of trade historically, there’s been some trade surpluses, trade deficits. But really since China was admitted to the World Trade Organization in 2001, you’ve seen a gradual increase in the US trade deficit.

    So I think that’s the primary reason behind all this. In addition to that, I think some of what you’re seeing is politically motivated. The mid-term elections are drawing closer, so just look at Trump’s campaign slogan, Make America Great Again. So whether you agree or disagree, the Trump administration has taken the position that certain countries, especially China, have not created a level playing field when it comes to global trade.
    There are concerns about restrictions on foreign investments, intellectual property theft, and even the current imposition of tariffs on various US goods and services. So the use of tariffs is really nothing new– or protectionistic trade policies. They’ve been around really since the history of the United States, even post-World War II. I think what a lot of people fear is what I would consider a Smoot-Hawley outcome.

    The Smoot-Hawley Act was passed, I believe, in June of 1930, under the then President Herbert Hoover, who was supportive of it, and which resulted in a large number of tariffs being imposed on foreign goods and services. And a lot of economists believe that was a factor that contributed to the severity of the Great Depression. So I think that’s the fear. I don’t think it’s likely to come to fruition.

    [SPEAKER: JEN FOX] So, Tony, a question, though. Because there is a perception that tariffs are bad for everyone. So if that perception exists, why is the administration pursuing these antagonistic trade policies?

    [SPEAKER: TONY NATALE] It’s a very good question. I’m by no means a political science or foreign trade expert, but I’ll take a shot at your question. So Trump believes that most trading partners have at least– in our opinion have more to lose, since many are running sizable trade surpluses. So we think the administration is expecting foreign nations to relent at least to some degree, so that more favorable trade deals can be agreed upon going forward.

    So even if you look at the most recent tariff announcements, which is 10% on $200 billion worth of Chinese goods, and you combine that with the previously announced tariff announcements, and then you factor in some type of retaliatory effort by China, the total amount of tariffs is not likely to surpass $50 billion.

    So this figure pales in comparison to the size of the fiscal stimulus package as well as the total dollar amount of all US imports and exports. So overall, the threat of a global trade war is rising. But we still believe that the odds of that happening is relatively low.

    [SPEAKER: JEN FOX] So with all of that, how have the financial markets been reacting to the headlines and the news that we hear on the airwaves?

    [SPEAKER: TONY NATALE] Really, there’s been concerns about tariffs or comments from Donald Trump, really since he was sworn into office. But the news surrounding tariffs really bubbled to the surface in early March. So volatility has picked up within the equity markets as you would expect. US stocks, surprisingly, have held up pretty well. The S&P 500 Index is up close to 3% since early March.

    The Russell 2000 Index, which is comprised of small-cap companies– which have a tendency to be more leveraged to the domestic economy are up close to 12%. So US stocks overall have held up pretty well. If you go overseas, it’s a little bit of a different story. International stocks have struggled.

    The MSCI EAFE, which is an index used to measure developed market stocks, is down roughly 3%. And the MSCI Emerging Markets Index is down even more closer to 9%. On the fixed-income side, long bonds have rallied a bit, but nothing significant. And the yield curve has continued to flatten. So far the US markets look OK.

    And in terms of international markets, at least some of the selling you’ve seen, we believe is at least attributed to some profit-taking from last year. Emerging market stocks were up close to 37% in 2017. And there has been marginal weakening in some of the economic data that we’ve seen that really preceded the tariff announcements.

    [SPEAKER: JEN FOX] So with all of that news and given how the markets have reacted, has any of this caused your group to alter its financial market outlook?

    [SPEAKER: TONY NATALE] Well, the short answer is no. We are overweight international equities, more so emerging markets from a strategic asset allocation standpoint. So this year has been a little bit painful and challenging. But like we said in our most recent quarterly summary, global trade disruption is worthy of our attention going forward. And we truly believe that.

    However, corporate earnings in 2018, at least if you look at consensus estimates, are expected to grow close to 16% within the MSCI Emerging Markets Index and close to 7% within the MSCI EAFE Index. So the earnings outlook, really at this point, hasn’t been kind of factoring in some of these macro concerns.

    And then we haven’t seen that as of yet in terms of the outlook for corporate profits. So in addition to that, international equities have really lagged significantly since 2010, kind of the exact opposite that you saw in the previous decade. So we continue to– and these stocks continue to trade at discounts to US equities.

    So the latest round of volatility really could be an opportunity for longer-term investors within that asset class. So we remain optimistic about the trajectory of economic growth and corporate profitability over the near term, especially in the US. And the latest round of volatility is a little bit concerning, but it’s not too unexpected, given how low volatility has been kind of coming into this year.

    But we do acknowledge that we’re in an extended period of economic expansion. And there’s been pretty positive equity returns really coming out of the ’09 recession. So overall, we encourage clients to stay diversified within their targeted asset allocation ranges and really not do anything too drastic in terms of making any type of market timing call.

    [SPEAKER: JEN FOX] Tony, thank you so much for your insights and your time today.

    [SPEAKER: TONY NATALE] Happy to do it. Thank you.

    [AUDIO CONCLUSION/CLOSE] This has been a production of Bryn Mawr Trust, copyright 2018, all rights reserved. Visit us online at


    The views expressed herein are those of Bryn Mawr Trust as of the date recorded and are subject to change without notice. Guest opinions are their own and may differ from those of Bryn Mawr Trust, its affiliates, and subsidiaries. This podcast is for informational purposes only and should not be construed as a recommendation for any product or service.

    BMT Wealth Management provides products and services through Bryn Mawr Bank Corporation and its various affiliates and subsidiaries, which do not provide legal, tax, or accounting advice. Please consult your legal, tax, or accounting advisors to determine how this information may apply to your own situation.

    Investments and insurance products are not bank deposits, are not FDIC insured, are not backed by any bank or government guarantee, and may lose value. Past performance is no guarantee of future results. Insurance products not available in all states.