The first volley of shots in the America vs. China trade war was fired four days ago on July 6, 2018. 

America fired first. China fired right back.

U.S. equity markets, after sliding on tariff threats, rallied once again as the first round of 25% tariffs were levied.

If initial tit for tat tariffs lead to negotiations and an end to a potential war, the market will continue to rally, and we’re probably heading for new all-time highs.

But, look out below if both sides start lobbing the equivalent of tariff nukes, as President Trump has threatened.

That would likely take stocks down hard and possibly lead to a U.S. recession.

Here’s what shots were fired and how to prepare for the worst…

Prepare for Chinese Retaliation

On July 6, tariffs of 25% were set to be slapped on imports of $34 billion worth of Chinese imports into the U.S., mostly machinery and semiconductor parts.

The Chinese immediately retaliated by imposing 25% tariffs on an equivalent amount of U.S. exports of autos, soybeans, other agriculture products, oil, plastics, medical equipment, and liquid propane. American negotiators have told their Chinese counterparts there’s another $17 billion of goods about to be targeted. The Chinese said they’d match them instantaneously when they’re imposed.

But the real threat to a trade war going nuclear is President Trump’s hard stand last week to ultimately target more than $500 billion of goods. That’s a lot more than China exports to the U.S. in a year.

There’s no way the Chinese wouldn’t retaliate – it would be a matter of global posturing and standing up to the United States as an economic power as well as a military power. Of course, that’s a frightening prospect, on every level.

The Shanghai Composite is already down 23% this year because of tariff worries.

U.S. equity markets gyrated wildly in February and scared investors over ensuing months by rallying and sinking, rallying and slipping again, testing important support levels three times. The rally last week and yesterday saved the S&P 500 and Dow Jones Industrial Average from testing those lower support levels once again.

We’ve been here before. Stocks have rallied every time they’ve looked like they were going to test and maybe break support levels that almost every institutional investor and trading desk on Wall Street are watching. This time, the rally came on the heels of actual tariffs being imposed on Chinese products.

Save Your Optimism

Investors are optimistic about the relatively small amount of goods targeted by both sides will lead to more serious negotiations and ultimately a resolution to the trade dispute.

That’s not going to happen.

The U.S. president isn’t about to back down without considerable Chinese concessions. And the Chinese aren’t about to bow to the U.S. president, as the entire Pacific Rim and the world watches.

And I’m not the only one who sees it.

Strategists from Bridgewater Associates, the largest hedge fund in the world, sent a note to clients recently that explained their bearish stance.

“We are bearish on financial assets as the U.S. economy progresses toward the late cycle, liquidity has been removed, and the markets are pricing in a continuation of recent conditions despite the changing backdrop.”

Okay, that’s not great news. So how did they restore their clients’ hope in the future?

“2019 is setting up to be a dangerous year, as the fiscal stimulus rolls off while the impact of the Fed’s tightening will be peaking, “and”… since asset markets lead the economy, for investors the danger is already here.” 

Oh. America is headed right off a cliff into economic disaster.