Trade War and Market Noise

Trade War and Market Noise

The trade war has been going on for months and in another post, we tried to explain the trade war using an alternate example. The trade war has since escalated to another level, generating a lot of market noise.

On 5th may 2019, what was supposed to be a peaceful Sunday, was broken by the deafening silent tweet of Donald Trump. Presidential market noise regarding the trade war negotiation.

Trade war negotiations with China has broken down with US President Donald Trump increasing tariff on Chinese goods to 25% eventually. The full list of goods affected by the 25% tariffs is here. (Warning! 196 pages long for products ranging from eels to hammers to ATMs.)

After more rounds of ping pong, on 15th May 2019, Huawei Technologies was singled out by the Trump Administration and US companies were effectively banned from doing business with them. To comply with the ban, Google stopped providing updates to Huawei phones.

The Market Reaction

Huawei Founder Ren Zhengfei responded to the ban by giving his appreciation to US companies, including Google, and declaring that Huawei has prepared for US action and is now ready.

After Donald Trump’s tweet, the S&P 500 index lost 48.41 points or 1.6% on the first two trading day, which is actually not a lot.

Eventually, the S&P 500 index lost 133.77 points or 4.5% by 13th May, which is actually not a lot as well.

Trade War and Market Noise - S&P 500 Index

On the other hand, the VIX Index (Volatility Index), moved a lot more. Moving 4.94 points or 38% after Donald Trump’s tweet, eventually reaching a high of 22.64, an increase of 9.64 points or 74%.

This is the stock market for you, irrational. Volatility increases so much due to outside noise, but the market didn’t move much.

Trade War and Market Noise - VIX

US Government Not US Companies

Huawei Founder Ren Zhengfei responded to the ban by giving his appreciation to US companies, including Google, and declaring that Huawei has prepared for US action and is now ready.

Other than Google, companies like Intel, AMD, Qualcomm, Broadcom, Xilinx have had to stop their business relationships with Huawei due to the ban.

Huawei seems to have been handed a huge blow, with so many chipmakers having to pull out. Huawei founder Ren Zhengfei, has said that “blame should be directed at US politicians, not companies.

Who Suffers?

It may have seem that Huawei will suffer a lot from the ban. With so many US technologies poised to disrupt their operations.

Well, of course there will be a disruption in operations. No doubt about it.

However, to think that it will be fatal to Huawei is premature and to think that it is a masterstroke by Donald Trump and US business is a folly.

In a certain sense, a trade war is to bring business back to US for the short term. On the long term, a trade war does not have much benefits to all countries, usually ending with conflicts if not truce.

Take a step back, would China allow such a ban to adversely affect them? Will China take it lying down?

Especially when the trade war has sort of escalated to an embargo.

Who actually suffers?

Circle of Competence

Should investors panic together with the market? There are many market noise in the market noise now. Investing in a company now without the correct mindset and competence can result panic attacks.

Charlie Munger in Berkshire Hathaway’s 2002 AGM said this about competence,

“If you have competence, you almost have a feeling of where the edge of the competence is, because it wouldn’t be much of a competence if you don’t know where the boundaries is.”

This is exactly why you need to invest within your circle of competence, as it give you the knowing of where the competitive edge of the company is in.

With market noise such as now, you will be able to understand if the ban by Donald Trump will affect your investment. And thereby, be able to make a rational decision instead of having a panic attack.

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