The real risk here is that if the confrontation continues, it will increasingly affect both business and consumer confidence. Business confidence has already pulled back, although it remains expansionary. But consumer confidence remains strong. The U.S. economy largely depends on internal demand. So, a pullback in consumer confidence is what could ultimately cause a deeper and longer decline in financial markets. This scenario, however, would take time. And unlike the stock reaction, it would not be immediate.
Not Time To Panic
We therefore need to pay attention to how the situation evolves, but now is not a time to panic. So far, we are seeing a rational reaction by markets to a change in circumstances; moreover, it is one we have seen before. Chances are that a deal will be reached and conditions will normalize.
Even if they do not, the fact is that the U.S. economy remains solid—and that will not change overnight. With hiring still strong, with consumers confident and spending, and with the recent rate cut by the Fed providing a tailwind, there is a considerable amount of cushion for financial markets to help them weather the policy-related turbulence around the trade war. Any decline will likely be gradual, and we will have time to respond.
Brad McMillan is the chief investment officer at Commonwealth Financial Network.