07/09/2018
That was the title of a 1970 movie that cost three times as much to make as it generated in box office revenue. It might serve as an apt analogy to the market reaction to the opening round in the U.S. trade war with China. China specific tariffs took effect on Friday, and yet stocks rose pretty much everywhere, as investors chose to focus on economic conditions in the present, rather than speculating on the longer-term implications of a trade war. For how long investors will be able to look beyond these rising trade tensions remains to be seen, but at least on the first day it was a war to which nobody came.

The S&P 500 index climbed 0.9 percent on Friday and rose 1.6 percent on the week. That was preceded earlier in the day by 0.2 percent gain in the EuroStoxx 50 index, which also climbed 1.6 percent for the week. Even the Shanghai Composite rose 0.5 percent on the day, although it fell 3.5 percent for the week. Bonds were little changed, although the yield curve flattened a little further to a new eleven-year low. The dollar was a little weaker, and the VIX index of volatility declined sharply. And despite being a target of China’s retaliatory response, soybeans were among Friday’s best performers, rising 4.5 percent on reports of foreign buyers other than China stepping in to take advantage of the almost 20 percent decline in the price of soybeans in the past month in response to the trade tensions.

Investors Focus on Strong Employment Numbers and Earnings

In the U.S., investors chose to focus on the June employment report, and it was about as good as it gets. The economy created 213,00 new non-farm jobs, and the prior two-month total was revised higher by 37,000. At the same time, the unemployment rate rose to 4.0 percent as more potential workers were drawn into the labor force. And wage gains remained moderate, giving the Fed no additional incentive to raise rates more aggressively. Earlier in the day German industrial production in May far exceeded expectations, offering additional evidence that Europe is starting to shake off its slow start to the year. There was even some news on Friday that, after months of infighting, the British government was getting its act together as it faces the home stretch of Brexit negotiations.

It won’t be long before investor attention turns to second quarter earnings results, which get underway this week. According to Factset, 20 percent growth is expected in the quarter led by energy, materials and telecom. It would mark the second straight quarter of 20 percent plus earnings growth. Of particular interest will be the extent to which managements mention the impact of trade on their operations and the planning. For now, according to Factset, full-year earnings are also expected to grow by 20 percent. The Price/Earnings multiple on the S&P 500 has declined in response to strong earnings and a modest rise so far this year, improving their relative attractiveness, although stocks are not cheap. The S&P 500 is higher on the year by 3.2 percent, but the trailing P/E has edged lower to 21X from 21.7X at the start of the year, according to Bloomberg. If full year earnings growth is as strong as forecast, with no price change that P/E would fall to 17.3X.

How Long can Investors Ignore a Trade War?

Should the trade war with China persist, or expand beyond its present scope, investors will not be able to ignore it forever. Perhaps for consumers that day will arrive when they begin to notice higher prices, or in some cases lost jobs. The business community has been quite vocal in its opposition to tariffs right along. For investors, that day might arrive if they lose confidence that a strategy exists to resolve these disputes. How should we even define a successfully prosecuted trade war?

For now, the economic stimulus from tax reform and the budget deal is providing cover to fight the trade war. Should that boost begin to fade, expect the voices of opposition to grow louder.

Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
Past performance is not a guarantee of future results.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list. 
The Shanghai Composite Index is a capitalization-weighted index of all stocks on China’s Shanghai Stock Exchange.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.
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