Stock market volatility is up -- and the U.S. stock market is down, losing more than $1.3 trillion in value -- since President Trump's threat last week to impose 10% tariffs on an additional $300 billion in Chinese imports starting Sept. 1.

While China is still a relatively small profit center for U.S. companies, generating around $80 billion in profits annually from sales there, that is expected to change in coming years.

The bottom line for American investors is: China's future growth means a lot more to the U.S. stock market (and the size of your 401(k) account) than it does to the U.S. economy right now.

Americans' 401(k)s may be at greater risk in a trade war with China than it appears. That explains a good deal of the stock market's volatility for the past few days -- and why more market mood swings are likely on the way.

Consider this: Without sales in China, the large U.S. companies in the S&P 500 stock index that make up the bulk of most Americans' retirement accounts would collectively be worth 13% less, or $3 trillion, than they are worth today. The drop would put the S&P 500 at just above 2500, or nearly 400 points below where it is now. That's on top of the 130 points the S&P 500 has already fallen, or about 4%, since President Donald Trump's surprise announcement last week that the U.S. would ramp up its tariffs on Chinese goods, escalating the U.S.'s trade war with the world's fastest-growing large economy.

Trade war everywhere



And that's just China. Imagine if the U.S. were to enter a prolonged trade war with much of the rest of the world, drying up U.S. companies' overseas sales in major areas of Europe, Asia and the Americas. Well, that could send stocks and 401(k)s down 50%, with the S&P 500 falling 1,400 points and the Dow tumbling 13,000 points from its current 26,000.

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And that's only if the U.S. economy could weather such a drop in international sales. A trade war like that, not to mention a stock market drop of that size, would send the U.S. into a deep, deep recession, taking the stock market even farther south.

Obviously, we're not there yet. Mr. Trump's threat of a 10% tariff on about $300 billion in Chinese consumer goods starting Sept. 1 would likely only mildly increase prices in the U.S. China's retaliatory measures would probably slow our sales to that country, but not cut them off completely.

Growth in China is the great investor hope



Yet it's important for investors saving for retirement to get a handle on how much trade with China means to the U.S. stocks in their 401(k)s. Doing so can go a long way to understanding the market's sudden lurches of the past few days -- including the 767 point drop in the Dow on Monday and the 1,000-point-wide swing down and then up on Wednesday -- at a time when little else seems to be bothering investors, whether it's political turmoil in Washington, D.C., or detained oil tankers in the Persian Gulf or growing evidence of a slowing economy around the world.

On the surface, Wall Street's reaction to the threatened China tariffs might seem overdone. Strategists at Goldman Sachs, for instance, recently predicted that U.S. GDP growth will snap back in the last four months of 2019 and that investors should consider buying banks and other stocks that tend to do well when the economy is improving. Goldman's chief U.S. strategist still thinks the S&P 500 will reach 3,100 by the end of the year, a nearly 8% rise from where the stocks closed on Wednesday.

And that makes sense if you look only at what China's economy means for U.S. companies today. China, after all, is still a relatively small profit center for American business. U.S. companies are expected to generate around $80 billion in profits from their sales in China in 2019, far less than the $1.3 trillion the stock market has dropped in the wake of Mr. Trump's tariff pronouncement last Thursday. Those China earnings are also a small portion of the overall $1.4 trillion dollars in profits that S&P 500 companies are expected to earn this year.

Stock prices are about the future, not the past

But the math that's underlying the stock market's current decade-long bull run, the longest on record, does not follow the earnings that China is contributing now -- rather, it's the massive sales growth and profits that investors expect U.S. companies will make there in the years to come. The problem for your 401(k) is that the presumed growth from China is already baked into current stock prices. Without access to a global economy, U.S. companies will face a future growth crunch. The end of globalization means the current numbers behind U.S. stock market valuations do not add up.

Here's what doesn't compute: The average stock in the S&P 500 is trading at roughly 17.5 times this year's expected earnings. Stock market earnings multiples, or the price-to-earnings ratio, never exactly match earnings growth, but they are supposed to somewhat reflect it. And right now they don't, at least not the growth of the U.S. economy, which most experts think won't advance much more than 2% a year for the foreseeable future. That's the rub. Investors have long assumed that U.S. companies will make up that lagging U.S. growth difference overseas, where markets are growing faster, particularly in China, and where U.S. companies are grabbing more and more market share.

Put another way, China right now represents about 6% of the current overall sales of the S&P 500 but as much as one-third of the projected growth in sales of those same companies over the next 10 years. Add in the rest of the world, and nearly 80% of the expected growth in sales and earnings for the S&P 500 over the decade is expected to be derived overseas.

That's why President Trump's trade war and talk of economic nationalism is potentially so scary for investors. They have long bid up stocks on the notion that the U.S. was to be the hub, or at least a major spoke, in a global economy. If somehow Mr. Trump runs us off that road, the market will have to shift into a much slower gear.

To push the metaphor, the president's trade war is going to make both the U.S. economy and your retirement account a lot less fuel-efficient. That means future retirees are going to have to fill up their 401(k)s with greater contributions -- either by saving more or working longer or both -- than what previous generations have done. Without China, and the rest of the world, in our portfolios, the road to retirement for all of us will get a heck of a lot longer.