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Should You Worry About a Potential Trade War?

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RANDY FREDERICK: Just when the markets seem to be getting back on track following the February correction, they’ve gone back down and retested those lows again. Jeff Kleintop joins me for this week’s Stock Market Report to talk about one of the key drivers of all this volatility.

So, Jeff, it seems like a lot of the volatility lately has been caused by concerns about a potential global trade war. And while those concerns ebb and flow a bit from day to day, they haven’t gone away. Can you tell us, historically, how have stocks done during a trade war?

JEFF KLEINTOP: Well, Randy, it’s hard to say what stocks may do in a trade war. Countries that currently engage in high barriers to trade don’t really have a stock market. I’m talking about Venezuela, or Iran, or Zimbabwe, for example. And the last trade war among major countries was 90 years ago. So it’s hard to say, but it’s probably safe to say it wouldn’t be good. A trade war, just to define it, is when tariffs are raised steeply and broadly across a range of products, and the results have been very bad for the economy in the past. And trade wars were once common, but we haven’t seen one in a very long time for a lot of good reasons. The legacy, first of all, of economic destruction they left behind back in the 19th century is one of those reasons. Another one is increasing globalization and longer supply chains. We’ve also got this World Trade Organization dispute resolution process. And the result of all of that has been that tariff changes in recent decades have been modest, they’ve been narrowly focused, and they’ve been short-lived. And there are some signs that make us hopeful that we won’t see the current trade spats develop into a trade war, given the narrow scope of what’s been announced so far and the tendency of the Trump administration to use tariffs as a negotiating tool, rather than an end in-and-of themselves. That said, we haven’t heard the last from the Trump administration on trade, and while the current moves and retaliation may be modest in terms of their economic impact, there’s more to come, and trade risk remains among the top issues we’re watching for in 2018.

RANDY: Okay, so it does sound like a global trade war is probably not in the cards right now. But what guidance can you offer to investors who are concerned about a trade war?

JEFF: Well, you know, rather than make any portfolio changes as if a trade-war-driven bear market was imminent, a wiser strategy might be to simply rebalance portfolios back to long-term target asset allocation. In recent years, we’ve seen stocks outperform bonds by a pretty wide margin, and if you haven’t rebalanced your portfolio back to those asset allocation targets, you may be overweight stocks, and the heightened volatility in your portfolio resulting from these trade spats make you feel pretty uncomfortable, makes you feel like you might need to make some changes, or even sell everything. But what you really need to do next probably depends a lot more on you than on the market, or even on policy-makers. If you’ve been underweight stocks and waiting for a pullback, this may be your opportunity. But if you haven’t rebalanced and you’re overweight stocks in your portfolio, it’s not too late to sell. Even though stocks are off of their highs, they’re still just back to where they were late last year. Or you could just do nothing and allow your long-term perspective and diversified asset allocation to do what it’s meant to do through the volatility resulting from these trade spats.

RANDY: A lot of great information, as always, Jeff. Thank you.

Listen, you can read more from Jeff in the Insights & Ideas section on Schwab.com. You can follow Jeff on Twitter @JeffreyKleintop. And, of course, you can always follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.

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