How Do Politics Affect Your Financial Portfolio?
Political Legislation Affects Our Economy:
Whether it’s a new tweet by the president, or something more controversial, politics has an impact on the way people manage their investments. However, even in times of political unrest, the stock market has remained relatively resilient.
Recently, the market has successfully weathered political climates that had the potential to be detrimental in previous years. However, that calm may end as newly implemented tariffs with global trade partners go into effect.1 Tariffs increase the cost of imports, making American products more costly to source.
It is a common belief in economics that the burden of tariffs lies on the shoulders of consumers, as suppliers can adjust their pricing models accordingly. Tariffs are so divisive that a large body of economists continue to push for laissez faire economics (the belief that there should be no interference by government).
Tariffs in the Early 2000’s
In the past, the president’s power to deploy sanctions without congressional approval was kept in check. This was done by a provision that sanctions could only be enacted in the interest of our nation’s security (created by the Trade Expansion Act of 1962).2
President George W. Bush challenged that premise in 2002 when he increased tariffs on select steel products. The impact was short but it affected approximately 200,000 jobs in U.S. manufacturing. Moreover, the World Trade Organization ruled the tariffs illegal, stating that they violated U.S. trade agreements. President Bush withdrew the tariff policy less than two years later.3
What To Do About Federal Economic Policies…
Financial advisors generally caution against making changes to an investment portfolio based on political actions. The political arena is often reactionary and sensationalized in a way that isn’t favorable to a stable investment strategy.
It is better for you to focus on your personal financial objectives and construct a plan and portfolio designed to meet your specific goals.
However, there are several reasons you may consider adding a guaranteed component to your portfolio. The benefits include:4
- Transition higher-risk assets to a lower-risk position
- Position your portfolio to deliver long-term reliable income
- Prepare for potentially reduced Social Security benefits
- Reposition assets to mitigate potential declines triggered by global tariffs
What Should We Expect From the Economy?
Historical precedents indicate that the stock market does see some effect related to tariffs.5 On a fundamental level, tariffs restrict imports and often reduce domestic corporations ability to compete globally. As a result this often causes an economic contraction which is directly correlated to the amount of the tariff.
Possibility of Trade Wars
Some economists worry that a trade war could possibly undermine the burgeoning U.S. economy and offset the benefits of recent tax legislation.
The following industries are expected to be the hardest hit: 7
Energy: Many oil pipelines are made of specialty steels not currently produced in the U.S. Paying those tariffs or replacing foreign sources with domestic may possibly raise prices.
Auto manufacturers: European car manufacturers in the U.S. export 60 percent of their cars and employ 120,000 American workers in U.S. manufacturing plants; auto tariffs could impact $300 billion in U.S. exports.8
Farmers: With no forthcoming trade agreements, China has already imposed retaliatory tariffs on U.S. agricultural exports such as soybeans, fruit and pork.9
A global trade war could further affect a wide range of industries by disrupting global supply chains in sectors that rely on outsourced components. While some officials argue that other countries have more to lose in a trade war against the U.S., there is still a lot of information to consider for companies, employees and investors who may be impacted in the interim.10
