Volatility over U.S.-China trade war has advisors navigating headline risk

Headline risk over the U.S.–China trade conflict is keeping advisors on their toes as they try to navigate client portfolios safely through stepped up volatility.

President Trump’s warning of an additional 100% tariff on Chinese imports, a response to Beijing’s new rare-earth export controls, briefly sent technology and crypto-linked stocks tumbling last week before markets rebounded on hopes of de-escalation. The wild ride continued this week when Trump told reporters his spat with China over trade has already morphed into a full-blown trade war.

And all this posturing comes two weeks before the President is slated to meet Chinese President Xi Jinping, so wealth managers can look forward to more fireworks in the days ahead.

Austin Graff, chief investment officer at 49 Financial, for one, believes it’s important not to overreact to headlines, despite the outsized stakes. The best approach in his view is to remain diversified and consider shying away from exposures showing “excessive enthusiasm.” 

“Tech and growth stocks looked stretched from a valuation perspective. However, in the short run stock prices are more influenced by emotion than valuation,” Graff said.

Elsewhere, Lexie Head, founder and managing partner at Mercer Wealth Management, a Sanctuary Wealth partner firm, believes the current trade tensions may act as a catalyst for a near-term correction, creating opportunities to deploy cash that has been on the sidelines.

“While tech and growth stocks are due for a pullback, we remain bullish on the long-term potential of artificial intelligence and its transformative economic impact,” Head said.

Moving on, Andrew Graham, founder and portfolio manager at Jackson Square Capital, is telling clients to steer clear of unprofitable stocks due to the jittery market action. In addition, he recommends they set stop losses on individual positions, and watch for levels where systematic funds might start cutting back on long equity exposure.

“Among discretionary investors, long equity positioning is hovering just above neutral, while the positioning of systematic traders and volatility control funds appear close to full,” Graham said.

Mike Martin, vice president of market strategy at TradingBlock, says investors with shorter time horizons need to stay “incredibly agile” in this market due to the U.S.-China trade battle. Nevertheless, he still sees more upside for stocks before the rally sputters out.

With that said, however, he has been steadily moving a small portion of his portfolio into Treasuries on days when stocks hit new all-time highs because “being greedy rarely pays off.”

POLITICAL POSTURING OR WORSE 

The barbs between Washington and Beijing is also forcing advisors to determine whether this back and forth is short-term political posturing, or a new phase of economic nationalism that could reshape long-term asset allocation strategies.

Graff, for one, sees a period of deglobalization ahead, where countries are more focused on local production and supply chain stability than they are on lowest cost of production. 

“This process has many ripple effects, however the outcome for our portfolios is that we are looking beyond the US for attractive opportunities. We are expecting non-US growth to accelerate off very low levels and US growth to decelerate from abnormally high levels,” Graff said.

Similarly, Graham, believes the U.S. trade agenda has entered a new phase under Trump which is far more than a bout of political posturing. The focus on reshoring manufacturing for national security reasons, countering perceived Chinese mercantilism, and addressing long-standing trade imbalances suggests a more structural shift, according to Graham.

He adds that it also seems increasingly likely that the U.S. Treasury will grow dependent on tariff revenues, further hardening stances.

Mercer Wealth’s Head, meanwhile, says trade policies and tariffs are likely to persist beyond the current administration and will influence global commerce long term. That said, she feels it’s also important to remember that political sentiment is cyclical.

“While these developments may inform strategic asset allocation, the environment does not yet warrant drastic shifts. Investors should remain vigilant, but focus on measured, strategic positioning,” Head said.

On the flip side, TradingBlock’s Martin dismisses all the recent noise across the Pacific as “short-term posturing.”

“I don’t think American voters have any desire for economic nationalism. In the long run, that’s all that matters,” Martin said.