The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.
When it comes to market-moving developments in Washington, Congress is usually the key player. The new tax law, debates over health care reform, government shutdowns, and fights over increasing the debt ceiling are just a few of the heated policy battles that have kept investors glued to their news feeds in recent years.
This summer could be different. Congress faces few deadlines and almost no prospects of passing—or even debating—major legislation in the coming months. Lawmakers are already focused on November’s high-stakes mid-term elections, and neither party wants to give the other a legislative “win” that could be used to gain an advantage going into the election.
As a result, the markets’ focus has shifted to President Donald Trump’s White House as it considers potentially momentous changes to the country’s trade policy and relationship with North Korea.
What follows is a closer look at some of the issues investors should keep an eye on in the weeks ahead:
Trade issues dominate
Expect trade issues to be front and center in the coming weeks. The Trump administration is taking on major trade issues on several fronts, and the resolution—or collapse—of negotiations could impact the markets.
Broadly speaking, there is little economic upside to a trade war, but even trade agreements can spread their benefits unequally. While some sectors or companies could get a boost from having access to new markets, others might struggle in the face of new sources of competition. That’s why the market is sure to keep a close eye on how the Trump administration navigates a tricky quartet of interconnected trade issues:
- Steel/Aluminum tariffs. After announcing a 25% tariff on imported steel and 10% tariff on imported aluminum in late February, President Trump gave eight of our trading partners a two-month exemption: Argentina, Australia, Brazil, Canada, China, the European Union, Mexico and South Korea. Since then, the United States has sealed a bilateral trade agreement with South Korea that made its exemption permanent. Late on April 30, the president announced a fresh one-month extension for the remaining countries, allowing more time for negotiations. Progress is reportedly being made in talks with Argentina, Australia and Brazil, and the tariffs have become part of the separate ongoing negotiations over the North American Free Trade Agreement (NAFTA) with Canada and Mexico. However, the tariffs remain a sticking point for China and the European Union—potentially to the point of igniting a trade war.
- China talks. Treasury Secretary Steven Mnuchin, U.S. Trade Representative Robert Lighthizer and other senior officials traveled to China for trade talks in early May, but made little progress. Negotiations could be lengthy. The two countries have been engaged in a rhetorical tit-for-tat, with each side threatening tariffs and other restrictions, including President Trump’s threat to slap tariffs of as much as $150 billion on Chinese imports. So what do they want? U.S. negotiators want help shrinking the country’s $375 billion trade deficit with China. They also want China to offer less state support to domestic tech companies and a promise to open China’s market more to U.S. companies. China wants the United States to drop its investigation into intellectual property abuses, eliminate various tariffs and permit it to continue offering state support to some Chinese companies. The issues are multi-faceted and complex and won’t be solved easily. Before leaving for China, Lighthizer was quoted as saying “we’re going to spend the next year developing how we deal with each other,” a clear signal that talks between the two nations won’t be wrapped up anytime soon. Still, the fact that talks are taking place at all is a positive sign. The markets will be watching.
- United States-EU relations. Trade watchers in Washington are growing increasingly concerned about a potential trade war with the EU. EU officials have said they would hit back if the United States decides to keep the tariffs on steel and aluminum. So far, they have threatened tariffs on products like blue jeans, whiskey and Harley-Davidson motorcycles. Complicating matters is the fact that the 28 members of the European Union have a wide range of interests and issues. Leading members such as Germany and France, for example, are divided over how to proceed. Germany has taken a more conciliatory tone, hinting it could lower tariffs on American-made cars as part of the negotiations. But France is pushing a harder line. There is little optimism in Washington that a deal can be reached by the June 1 deadline. That would leave President Trump with a difficult choice: Offer a new exemption—potentially undercutting his bargaining position—or impose the tariffs and potentially push us into a trade war with our largest trading partner.
- NAFTA negotiations. Negotiations over NAFTA seem to be going more smoothly. US Trade Representative Lighthizer is scheduled to meet with his counterparts from Canada and Mexico on May 7 and has said he believes negotiations could be wrapped up before month’s end. Any deal would likely include a permanent exemption for the two nations from the steel and aluminum tariffs. One possible sticking point: Congress would need to ratify a new agreement and it’s not clear when or if that would happen.
North Korea talks
The surprising thaw in relations with North Korea is another interesting development for the market. As recently as August, President Trump tweeted that North Korean provocations would be met with “fire and fury like the world has never seen.” The escalating tensions rattled markets and raised the specter of a nuclear confrontation.
Fast forward nine months and South Korean president Moon Jae-in and North Korean leader Kim Jong-un have already concluded face-to-face talks and all signs are pointing toward a summit between Kim and President Trump in the weeks ahead. Kim has also said publicly that he would end his pursuit of nuclear weapons if the United States agreed to formally end the Korean War and agree not to attack his country.
Such a deal would likely be a boon for global markets. But it’s important for investors to recognize that we are a long way from the finish line. North Korea’s long history of isolation and deception mean a healthy skepticism is in order, no matter how optimistic one feels about the Korean peninsula.
Light Congressional agenda
How about later in the year? Lawmakers do have one deadline looming: Federal funding allocations must be completed by Sept. 30. If Congress can’t find a way to appropriate funding to keep the government running, it could shut down on Oct. 1. Despite the partisan animosity in Congress, we think the chances of a fall shutdown are low. Neither party is likely to want to shut down the government a few weeks before Election Day. Expect an agreement to be worked out in September that ensures the government is funded at least through the election and perhaps until the new Congress is convened in January.
While there is always the possibility that a crisis could arise or the Washington agenda change, investors will probably want to keep their eyes on the White House’s policies on trade and diplomatic relations. Those issues could end up moving markets more than anything Congress does in the near term.
What you can do next
- If you’ve built a solid financial plan and a well-diversified portfolio, it’s best to ignore the political noise and focus on your long-term goals. Want to talk about your portfolio? Call our investment professionals at 800-355-2162.
- Watch Schwab experts discuss other market and economic topics in the Stock Market Report.