If you took a look at the S&P 500, it would be pretty easy to conclude that the escalating trade conflict with China is not a problem for the U.S. economy. Then, if you took a look at China's market, you might go on to think that the tariffs are really hurting the Chinese and that they should be coming to the table hat in hand.
The Shanghai Composite Index has been absolutely crushed, down about 50% from 2015 highs.
Investors are running from China. The U.S. is clearly winning, right?
Well, not so fast. There's more at play than just tariffs. We also have to look at retirement accounts, share buybacks, interest rates, and emerging markets to get a real look at what's going on...
401(k)s? Share buybacks? How does that fit in with all the trade and tariff talk?
Glad you asked. Because the stock market serves a different purpose in the U.S. than it does in China.
Sometimes I look at the S&P 500 and it seems like one big retirement savings fund. Every two weeks, your (and my) 401(k) contributions come out of your paycheck and go right in the stock. Add in IRA investments, pension funds, and annuities, and we're talking about $28 trillion in assets — roughly half the value of the S&P 500.
For the record, when you buy an annuity, you're not buying stocks, exactly. But the company that sold you the annuity sure is. How else do you think they make enough of your money to pay you out every year? Sure, not all the money goes into the market. You're still exposed. That's just one of the, like, 300 reasons I have for not liking annuities. At all.
Anyway. Corporate share buybacks have been running about a trillion dollars every year. Between them and retirement investing, that's a lot of buying power consistently flowing into the market. Total stock market assets under management are around $37 trillion in the U.S. The U.S. stock market is built to go higher most of the time.
The Chinese stock market is nowhere near as intricately intertwined in the average citizen's life. Total assets under management in China just jumped a massive 22% last year — to $4.2 trillion.
What Goes Up...
So when we look into the rearview mirror at the financial crisis, it's pretty easy to see why there was such a deep degree of panic. Every U.S. citizen's prosperity is directly tied to the stock market. Even the people who aren't invested in stocks at all are dependent on those who are.
This sounds bad. And I do believe Americans typically don't fully grasp how dependent we are on stock prices. But I'd also argue that economic growth is geared to move steadily higher...
Here's my simple formula: The population grows. Inflation lowers the spending power of the dollar. Prices and wages rise over time. More people with more money means more spending. More spending means more revenue and profits for corporations. Stock prices rise.
It's not a perfect formula, mind you. It is dependent on a growing population (immigration reform, please). And if you read between the lines, you can see why the Fed is concerned by weak inflation and terrified by deflation.
Every once in a while, this growth cycle gets a correction. Whatever the root cause, the effect is that Americans suddenly have to spend less money, which sets off the vicious cycle of falling corporate revenue, layoffs, and less spending.
These events are pretty much always a surprise. In the 1970s, it was oil embargos. In the 1980s, it was crazy high interest rates. In the 1990s, we saw the first true global contagion during the Asian Currency Crisis. In the early 2000s, I'd argue that the 9/11 attacks were a bigger cause of that recession than the tech bubble collapsing. Then we had the financial crisis...
What's next? Dunno. And there's no way to know for sure, either...
The biggest thing I worry about is the long-term implications of automation. For instance, McDonald's is starting to replace cashiers with kiosks. Something like 30% of Amazon employees qualify for some kind of government assistance...
Weren't We Talking About Trade and China?
Why, yes. Yes, we were talking about China...
President Trump says he is on the verge of laying down tariffs on another $200 billion worth of Chinese goods. He likes to say this is bringing billions in investment to the U.S. And for argument's sake, let's just ignore subtleties and say this is true. U.S. GDP is $18 trillion. With a "T."
The U.S. trade deficit with China — around $150 billion — is literally a drop in the bucket. Even if every penny of the trade we do with China was generated in the U.S., the effect would be incremental. Ford wouldn't be somehow suddenly hiring a million people and hiking their wages 30%.
Companies hire workers when there is consumer demand for a product or service. Ford will be more apt to hire workers if it can keep selling American-made Mustangs in China. Sales were up 35% last year. Tariffs aren't going to help that. And in fact, if Mustang sales fall in China, guess who pays the price?
Real growth comes from investment. That's true for the U.S. economy, and it's true for you. There's not much any individual can do to encourage the government to invest in growth. But for you, it should be an easy decision. Focus on the long-term trend for the U.S. economy and U.S. companies.
And also focus your investments on the real growth trends. Cloud computing is a big one. The hosts, like Microsoft and Amazon. The data centers.
Look at the companies that are able to really leverage the time we spend on our stupid phones. Like Grubhub. Spotify. Or Starbucks. Even Twitter (which I think is way more mobile friendly than Facebook).
Markets may stay a little weak as all this tariff stuff gets worked out. Long term, though, the U.S. stock market is the place to be.
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