Investors Have Mostly Ignored the Trade War … Until Now
Stocks have been ostensibly resilient throughout the trade war dating back to last spring. When the president said, “trade wars are good, and easy to win” on March 2, 2018, the S&P 500 ended the day at 2691. At the close one week ago on Friday, it stood at a record 3025, a gain of more than 12 percent. But the majority of that move has come since June 4 when Fed Chair Powell said he would do what it takes to extend the current expansion. From that point in time through last Friday’s record closing high, the S&P had climbed 10 percent.
A strong argument can be made that until now, the trade war has been a distraction but not the main driver of stock prices. Rather, it has been Fed policy that has been the main catalyst, initially perceived as being too tight and triggering the sharp fourth quarter selloff, followed by its subsequent policy reversal.
When Does the Trade War Become a Real Problem for Investors?
The question for stocks is at what point does the trade war become a problem. The consumer dominated U.S. economy has so far been able to shrug it off because employment is so strong and household balance sheets so healthy. Even the savings rate is running at its highest pace in 25 years. The damage so far has mostly been contained to those sectors directly affected, such as manufacturing and agriculture. In last week’s press conference Chairman Powell noted the impact on business confidence showing up in sluggish capital spending activity in the second quarter. But so far, the consumer sector has remained buoyant. Personal consumption in the second quarter was quite strong. The Conference Board’s consumer confidence survey in July unexpectedly surged higher in July leaving it just below its post-crisis high last October. And both the Bloomberg consumer comfort index and the University of Michigan’s consumer sentiment index have shown similar strength.
But the latest round of tariffs is more directly targeted toward consumer goods. And while $30 billion of higher costs are certainly manageable in a $21 trillion economy, consumers may now begin to take notice as those costs are passed through. Either that or profit margins will come under additional pressure at a time when corporate earnings growth has already been anemic. In the two-day selloff following the president’s tweet on Thursday, it was the cyclical sectors of the market that bore the brunt of the damage, especially energy, industrials and financials. But consumer stocks also slumped, especially retailers.
Bond Investors Have Been a Bit More Skeptical About the Outlook
The bond market has not been quite as sanguine about the outlook as have stocks. On March 2, 2018 the yield on the ten-year Treasury note was 2.86 percent and the slope of the yield curve between the three-month bill and ten-year note was 122 basis points (a basis point is 1/100th of a percent). Today, the ten-year yield is 1.85 percent and the slope of the curve is -22 basis points. Part of that downshift is certainly attributable to weakness elsewhere driving capital to the U.S. but ratcheting up the trade war with China is hardly supportive of growth in places like Germany and Japan.
Chairman Powell cited global weakness and trade uncertainty, along with low inflation as reasons to cut interest rates. It seems certain that he will now have to cut further, whether he wants to or not. Not only is he fighting to offset the effects of the trade war, but increasingly he is fighting to offset the impact of foreign central bank easing. In total, this is shaping up as a race to the bottom. The entire German yield curve turned negative last week and the European Central Bank (ECB) stimulus is poised to ramp up in September. Low and slowing growth and little inflation in a world awash in liquidity hardly seems like a recipe for higher interest rates.
President Trump has, for all intents and purposes, now gone all-in on his bet that prosecuting the trade war with China is a winning hand politically. With talks apparently going nowhere and China apparently increasingly willing to bide its time, the standoff is likely to persist into the U.S. election in fifteen months. The president has so far enjoyed bipartisan support for his tough stance. But whether that support proves to be durable will likely depend on how consumers react as the intensifying trade war begins to hit a little closer to home.
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.
The monthly Consumer Confidence Survey is conducted for The Conference Board by Nielsen, a global provider of information and analytics around what consumers buy and watch.
The Bloomberg Consumer Comfort Index measures Americans' perceptions on three important variables: the state of the economy, personal finances and whether it's a good time to buy needed goods or services.
The Michigan Consumer Sentiment Index (MCSI) is a monthly survey of U.S. consumer confidence levels conducted by the University of Michigan.
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.
Indexes are unmanaged and are not available for direct investment.
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- Chief Market Strategist, Ameriprise Financial
- More than 30 years of experience in the investment management industry
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