What are all these tariffs doing to your 401(k)?

As Wall Street’s expectations grow dimmer for a quick resolution on President Donald Trump’s tariff and trade disputes, the nest eggs of ordinary Americans hang in the balance.

Investors had been pinning their hopes on a potential meeting between the president and his Chinese counterpart Xi Jinping at this month’s G-20 Summit in Japan that could break the impasse, but that optimism is dwindling. CNBC reported that analysts from both JPMorgan and Morgan Stanley expressed doubt that the two leaders would meet and agree to a trade deal.

In a new research note, analysts at Goldman Sachs estimated there is a 60 percent chance that the U.S. will levy a 10 percent tariff on the remaining $300 billion of Chinese imports, a 70 percent chance that Trump will follow through on his threat to slap a 5 percent tariff on all imports from Mexico, and a 40 percent chance that the White House will implement sweeping tariffs on imported cars.

“We still expect deals with China and Mexico to lead to a removal of the tariffs, but not until late 2019/2020,” they wrote.

But that might be too late for the U.S. economy, market observers warned. “It’s going to continue to weigh on markets,” said Mitchell Goldberg, president of ClientFirst Strategy. “The longer it goes on, the worse it gets.”

A reversal in the market’s gains could be a sharp wake-up call for investors lulled into complacency by a historically long-running bull market. “The tariffs will hasten a nasty retreat in stock prices,” Goldberg predicted.

“They’re not positive. They’re going to cause friction. They’re going to raise costs for consumers, they’re going to raise costs for businesses,” said Sameer Samana, senior global market strategist for the Wells Fargo Investment Institute.

Wall Street and corporate America alike were caught by surprise at Trump’s sudden threat to disregard his administration’s new version of NAFTA with his Mexico tariff tweets last week. “That was just completely out of the blue,” Samana said.

“He’s clearly trying to please his base by turning tariffs into a social cause and it’s completely open-ended,” Goldberg said, which only magnifies the uncertainty faced by businesses. “What else could he do?”

Although the U.S. has an advantage in its relatively greater leverage over Mexico, tariffs on all imports would cut to the heart of an economic linchpin for the U.S. “The auto supply chain involves so many jobs in America, you could reverse the job gains very quickly if you mess with that,” said Jamie Cox, managing partner at Harris Financial Group.

The prospect that China could resort to non-tariff retaliatory tactics such as restricting access to its enormous domestic market also weighs on investors. “If trade and tariffs start to spill over into something more negative for global growth, as in this tariff issue isn’t resolved until sometime in 2020, it opens the door for more down side,” Samana said. “If China as a market is shut off for large U.S. corporations — that was their growth engine for the past five years.”

The puzzle for anxious investors is figuring out how, and when, these negative effects will hit their portfolios. Market observers say that the tech sector, small-cap and emerging market stocks are especially vulnerable, but this situation is so unprecedented that there isn’t a reliable, agreed-upon model for predicting where the chips will fall.

“For most individual investors, it’s very difficult to figure out how and when these things will matter,” Samana said. Anyone with retirement savings invested in the stock market needs to take a look at their asset allocation and evaluate their time horizon and stomach for risk. Investors, Samana said, need to “make sure they’re not leaning out over their skis in stocks.”

“When markets do really well, take some chips off the table,” he said. “It’s an okay time to be cautious. People have enjoyed a lot of gains over the last 10 years.”

Assuming that the past decade’s worth of market growth will continue indefinitely is foolhardy, Goldberg said. “That doesn’t really mean you can extrapolate that going forward.”

Goldberg said people should take a look at their asset allocations and consider if they are too exposed to stocks, given the current down side risk. “People are starting to take that into consideration because they’re hearing about the tariffs, but… they really need to get to it sooner than later,” he said.

Investors also shouldn’t assume that the quick rebound from last December’s free fall will be repeated if stocks face more fundamental growth challenges.

Cox said that the algorithms that drive much of trading activity today can make a spate of volatility seem worse than fundamentals would dictate. “We live in a world now where technical trading drives the markets in directions,” he said. Like the old saying about a frog in a pot of water that gets hotter slowly, investors should be more wary of sustained slides than sudden drops.

“People need to remember that normally when markets fall quickly, they recover quickly. It’s when they step down over time that it takes longer to recover,” Cox said.

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