resident Trump on Friday announced that tariffs on Chinese goods would be pushed up on November 1st another 100%, taking them to 130%. The surprising move on the US’s part was due to China’s aggressive restrictions on rare earth exports. Last Thursday, China announced widespread export controls on rare earths such as holmium and europium. Even countries that use require minuscule amounts of rare earths in their manufacturing processes must obtain a license to utilize rare earths sourced from China. Since China accounts for about 90% of world supply, that means virtually every use of rare earths will require approval from Beijing.
China asserts that its restrictions on rare earth are in response to recent US restrictions on exports of advanced semiconductors and the hardware and software needed to produce them. Beijing claims that their actions are less restrictive than President Trump’s aggressive moves to shore up American supply chains. China said on Sunday that they are “not afraid” of a trade war with the US.
This tit for tat tariff escalation caused major sell offs in world stock markets. The S&P 500 dropped 2.7% and the NASDAQ fell 3.6%. President Trump wrote on his Truth social platform on Sunday not to worry about “Highly respected President Xi. He doesn’t want a Depression for his country, and neither do I.” This statement, combined with Vice President Vance’s Sunday media appearances, renewed talk that President Trump will pull back from an aggressive tariff strategy. As with his tariff threats in the spring, President Trump may once again pull back from an aggressive stance with China once the costs of a trade war have been made clear. The market reacted to President Trump’s and Vice President Vance’s Sunday statements by cutting Friday’s losses in half on Monday.
The market’s initial moves upon the outbreak of a potential trade war gives some hint of what would happen should a trade war break out between the US and China. The cost of continued instability in one of the world’s largest trade relationships is difficult to imagine. We believe that large cap technology and other growth type names are extremely overvalued. As a result, we think that our current position underweighting the high flying “Top 10” large cap growth names remains the right call, and we are equally comfortable with our overweight to dividend and low volatility names.
