The trade war escalated last week after President Trump threatened new tariffs on imports from Mexico.  If implemented, the tariffs could hurt both the U.S. and Mexican economies. Mexico is America’s fourth largest trading partner, and the two countries are deeply interconnected. About two-thirds of U.S.-Mexican cross-border trade is within the same company (for example, a car company that manufactures in Mexico and sells in the U.S.), so the tariffs also could affect corporate supply chains and profitability. Needless to say, the development did not sit well with Wall Street, with last Friday’s losses capping a 6% decline for the S&P 500 in May.

What should investors do? We again caution against making knee-jerk portfolio changes in response to the latest trade-related headlines. Such an action could easily backfire since further market weakness may be the catalyst that motivates the White House and China (and now Mexico) to come together on a deal.  While we cannot know what politicians will do next, the incentives are overwhelmingly against any action that would cause lasting damage to the economy and markets.  That being said, there remains the risk that the trade war escalates unintentionally, or accidentally sets into motion a chain of events that is adverse for the economy.