Why U.S. trade war with China could be real downer for your 401(k)

By Stephen Gandel

/ MoneyWatch

Stock markets plunge as trade war escalates

Americans' 401(k)s may be at greater risk in a trade war with China than it appears. That explains a good deal of the stock market's volatility for the past few days — and why more market mood swings are likely on the way.

Consider this: Without sales in China, the large U.S. companies in the S&P 500 stock index that make up the bulk of most Americans' retirement accounts would collectively be worth 13% less, or $3 trillion, than they are worth today. The drop would put the S&P 500 at just above 2500, or nearly 400 points below where it is now. That's on top of the 130 points the S&P 500 has already fallen, or about 4%, since President Trump's surprise announcement last week that the U.S. would ramp up its tariffs on Chinese goods, escalating the U.S.'s trade war with the world's fastest-growing large economy.

And that's just China. Imagine if the U.S. were to enter a prolonged trade war with much of the rest of the world, drying up U.S. companies' overseas sales in major areas of Europe, Asia and the Americas. Well, that could send stocks and 401(k)s down 50%, with the S&P 500 falling 1,400 points and the Dow tumbling 13,000 points from its current 26,000.

Trending News

And that's only if the U.S. economy could weather such a drop in international sales. A trade war like that, not to mention a stock market drop of that size, would send the U.S. into a deep, deep recession, taking the stock market even farther south.

Dow tumbles more than 700 points after China devalues currency

Obviously, we're not there yet. Mr. Trump's threat of a 10% tariff on about $300 billion in Chinese consumer goods starting Sept. 1 would likely only mildly increase prices in the U.S. China's retaliatory measures would probably slow our sales to that country, but not cut them off completely.

Yet it's important for investors saving for retirement to get a handle on how much trade with China means to the U.S. stocks in their 401(k)s. Doing so can go a long way to understanding the market's sudden lurches of the past few days — including the 767 point drop in the Dow on Monday alone, and then the 1,000-point-wide swing down and up on Wednesday — at time when little else seems to be bothering investors, whether it's political turmoil in Washington, D.C., or detained oil tankers in the Persian Gulf or growing evidence of a slowing economy around the world.

On the surface, Wall Street's reaction to the threatened China tariffs might seem overdone. Strategists at Goldman Sachs, for instance, recently predicted that U.S. GDP growth will snap back in the last four months of 2019 and that investors should consider buying banks and other stocks that tend to do well when the economy is improving. Goldman's chief U.S. strategist still thinks the S&P 500 will reach 3,100 by the end of the year, a nearly 8% rise from where the stocks closed on Wednesday.

And that makes sense if you look only at what China's economy means for U.S. companies today. China, after all, is still a relatively small profit center for American business. U.S. companies are expected to generate around $80 billion in profits from their sales in China in 2019, far less than the $1.3 trillion the stock market has dropped in the wake of Mr. Trump's tariff pronouncement last Thursday. Those China earnings are also a small portion of the overall $1.4 trillion dollars in profits that S&P 500 companies are expected to earn this year.

But the math that's underlying the stock market's current decade-long bull run, the longest on record, does not follow the earnings that China is contributing now — rather, it's the massive sales growth and profits that investors expect U.S. companies will make there in the years to come. The problem for your 401(k) is that the presumed growth from China is already baked into current stock prices. Without access to a global economy, U.S. companies will face a future growth crunch. The end of globalization means the current math of U.S. stock market valuations do not add up.

China trade war backfiring on U.S., says former Trump adviser Gary Cohn

Here's what doesn't compute: The average stock in the S&P 500 is trading at roughly 17.5 times this year's expected earnings. Stock market earnings multiples, or the price-to-earnings ratio, never exactly match earnings growth, but they are supposed to somewhat reflect it. And right now they don't, at least not the growth of the U.S. economy, which most experts think won't advance much more than 2% a year for the foreseeable future. That's the rub. Investors have long assumed that U.S. companies will make up that lagging U.S. growth difference overseas, where markets are growing faster, particularly in China, and where U.S. companies are grabbing more and more market share.

Put another way, China right now represents about 6% of the current overall sales of the S&P 500, but as much as one-third of the projected growth in sales of those same companies over the next 10 years. Add in the rest of the world, and nearly 80% of the expected growth in sales and earnings for the S&P 500 over the decade is expected to be derived overseas.

That's why President Trump's trade war and talk of economic nationalism is potentially so scary for investors. They have long bid up stocks on the notion that the U.S. was to be the hub, or at least a major spoke, in a global economy. If somehow Mr. Trump runs us off that road, the market will have to shift into a much slower gear.

To push the metaphor, the president's trade war is going to make both the U.S. economy your retirement account a lot less fuel-efficient. That means future retirees are going to have to fill up their 401(k)s with greater contributions — either by saving more or working longer or both — than what previous generations have done. Without China, and the rest of the world, in our portfolios, the road to retirement for all of us will get a heck of a lot longer.

First published on August 8, 2019 / 12:52 PM

© 2019 CBS Interactive Inc.. All Rights Reserved.

How Trump's trade war could do real damage to your 401(k)

Here's why investors saving for retirement should pay close attention to President Trump's latest China tariff threat

9M ago cbsn-fusion-pres-trump-tweets-that-republicans-and-democrats-must-come-together-for-gun-legislation-thumbnail.jpg bacon-istock-480981165.jpg

"Bacon intern" will earn $1,000 for testing bacon

The California chain is aiming to generate social media buzz by dangling the one-day internship offer

3H ago bacon-istock-480981165.jpg Farmer preparing hay for cows in a pen

Climate change is creating a hungrier, pricier future, UN warns

A new scientific report finds a cycle of land degradation and climate change is growing worse, impacting food costs

4H ago Farmer preparing hay for cows in a pen 3-stephen-ross.jpg

Equinox and SoulCycle face boycott threats over Trump fundraiser

Customers are threatening to boycott fitness chains after reports that the chairman of their parent company will hold a fundraiser for President Donald Trump

6H ago 3-stephen-ross.jpg FILE PHOTO: A police officer stands next to a police cordon after a mass shooting at a Walmart in El Paso

Some Walmart employees call for retailer to end gun sales

E-commerce workers planned walkouts in several cities after two shootings at company stores in less than a week

19H ago FILE PHOTO: A police officer stands next to a police cordon after a mass shooting at a Walmart in El Paso ​Railroad heiress Gloria Vanderbilt Cooper is seen in a Jan. 4, 1964, photograph.

Gloria Vanderbilt, heiress and jeans queen, has died at age 95

Gloria Vanderbilt was the intrepid heiress, artist and romantic who began her extraordinary life as the "poor little rich girl" of the Great Depression

Jun 17 ​Railroad heiress Gloria Vanderbilt Cooper is seen in a Jan. 4, 1964, photograph. Apple Worldwide Developers Conference Opens In San Francisco

Apple announces iTunes replacement, iOS 13 updates

The tech giant is holding its annual conference where it announced some major changes concerning user privacy — and showcased one very expensive computer

Jun 3 Apple Worldwide Developers Conference Opens In San Francisco Boeing Holds Annual Shareholders Meeting In Chicago

Boeing CEO won't say 737 Max software design was flawed

Boeing chief Dennis Muilenburg spoke to the public for the first time since the Lion Air crash killed 189 people

Apr 29 Boeing Holds Annual Shareholders Meeting In Chicago Labor Department Reports 201,000 Added During Month Of August

Employment bounces back in March with 196K jobs added

After a disappointing February, strong job growth sends reassuring signals about the economy

Apr 5 Labor Department Reports 201,000 Added During Month Of August Twitter CEO Jack Dorsey And Facebook COO Sheryl Sandberg Testify To Senate Committee On Foreign Influence Operations

Israeli consultancy Archimedes Group banned from Facebook, and other updates from a year of crises

One year after the Cambridge Analytica scandal revealed unprecedented sharing of user data, Facebook still struggles with privacy issues

May 16 Twitter CEO Jack Dorsey And Facebook COO Sheryl Sandberg Testify To Senate Committee On Foreign Influence Operations

LEAVE A REPLY

Please enter your comment!
Please enter your name here