Susan Tompor: Trump’s threat to raise tariffs could bring bumpy ride for stocks, 401(k)

May 07-- May 7--Will tough talk about tariffs now tear into all the gains you made in your 401(k)?

At best, everyday investors should get ready for a bumpy ride in the days ahead. The Dow fell steeply in Tuesday trading.

The United States has accused China of backtracking on some potential key trade deals. A Chinese delegation is still expected in Washington, D.C., on Thursday for more trade talks.

Stocks could be vulnerable as the politics build around trade and tariffs, said David Sowerby, managing director and portfolio manager for Cleveland-based Ancora Advisors.

"The concern of a trade deal being watered down or delayed has raised concern among stocks," Sowerby said.

The Dow Jones industrial average closed at 26,504.95 points on May 3. But it lost ground this week. After much volatility on Monday, the Dow ended the day down by 66.45 points. On Tuesday, though, the Dow had tumbled 547.84 points after 2 p.m.

The Dow closed at 25,965.09 points -- down 473.39 points or 1.79% -- by the closing of trading Tuesday.

There's a worry that the trade uncertainty has the potential to hurt business confidence, reduce capital spending and put consumers on edge.

On the plus side, major stock indexes had been up 15% to 17% for the year through early May, thanks to a healthy economy, lower interest rates and the prospects for a trade deal with China, Sowerby said.

As a result, investors should not forget that the U.S. stock market does witness 5% setbacks on average twice a year and 10% corrections on average once a year.

"Broadly speaking, equity prices went on a tear for the first four months of the year with nary a material pullback," said Robert Bilkie, CEO of Sigma Investment Counselors in Northville.

"History tells us that there are usually price pauses. And trade frictions are as good a reason as any for traders -- not long term investors -- to realize profits," Bilkie said.

"I still believe the long term outlook for stocks is positive -- but this is a 5-10 year outlook, not 5-10 weeks," he said.

The Standard & Poor's 500 stock index surged 17.5% through April 30 -- ranking as the third best performing year-to-date run since World War II, according to Sam Stovall, chief investment strategist for CFRA Research.

The top year-to-date performance was 27.3% in 1975 -- followed by 19.1% in 1987.

"The natural question now is whether the market is in need of a rest," Stovall wrote on May 1 before this week's fallout for stocks.

He noted in an email Tuesday that the pushback from China to U.S. threat's of tougher trade penalties has triggered a "sharp digestion" on Wall Street of those earlier gains.

"Investors are now readjusting their assumptions to include the possibility that this issue will not be resolved anytime soon," Stovall said.

"We disagree and think a dragged-out trading discord would benefit neither side, since it would have negative implications on both global economic growth and U.S. re-election prospects," Stovall said.

Stovall said he would guess that a resolution would come in the months ahead, and likely no later than the third quarter.

Bilkie noted that there are many crosscurrents when it comes to the issues involving U.S. trade with China.

President Xi Jinping wants to be perceived by ordinary Chinese citizens as prudent and not susceptible to intimidation, Bilkie said.

"President (Donald) Trump, as we know, has many economic and foreign policy arrows in his quiver and virtually all have the points coated with a solution called intimidation," he said.

Yet against a backdrop of a strong U.S. economy and a weakened Chinese economy, in the very near term, China has more to lose than the United States by not agreeing to most of the terms of trade that have been negotiated, Bilkie said.

"I think the Chinese will come around and this will not prove a long term economic or stock market setback," Bilkie said.

Contact Susan Tomporat 313-222-8876 or [email protected]. Follow her on Twitter @tompor. Read more on business and sign up for our business newsletter.

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