Trade War: Why the Stock Market Isn’t Worried

Posted On June 29, 2018 1:04 pm

In the early days of the Trump administration, stocks and the overall market would drop or pop on his every tweet. Now traders mostly ignore all but the most severe and credible ones. Talk of a trade war is no exception. While some industries are feeling the pain, and some a few benefits of tariffs, the stock market has increasingly felt little or no lasting negative impact.

Peter Eavis of the New York Times explains why Investors Aren’t Fleeing the Stock Market.

At a conference held by a top investment bank in Manhattan last week, attendees were asked to submit what they thought was the biggest risk to the global economy. When their concerns showed up on the conference screen, these words were the most popular: Trump, trade war and protectionism.

Outside, meanwhile, the stock market was having another up day.

In recent weeks, against the expectations of many on Wall Street, investors have not run for the exits as President Trump has stepped up trade brawls with China, Canada and the European Union. On Friday, when the Trump administration and China announced tit-for-tat tariffs on $50 billion of goods from each country, the Standard & Poor’s 500 index finished barely lower. The index has gained 2 percent since the end of February, when Mr. Trump began to take action on trade in earnest, and it remains up 30 percent since his election in November 2016.

Why have the markets held up when the prospect of a trade war unnerves many on Wall Street? The United States economy appears to be a picture of health and corporate earnings are surging. That seems to have investors betting that the collateral damage will be manageable.

The Federal Reserve Bank of Atlanta predicted that the United States economy could grow at 4.8 percent rate in the second quarter, which would be the second-highest quarterly growth rate in the past decade. Unemployment is at multiyear lows, retail sales are strong, consumer confidence is high and the inflation rate remains relatively subdued. This strong run could continue if tax cuts for businesses and consumers prompt higher spending.

And, most important to investors, companies’ earnings are set to rise at their fastest pace since the years immediately following the financial crisis. Wall Street analysts expect the profits of companies in the S.&P. 500 to surge 26 percent this year, after a 17 percent rise last year.

Rising profits might explain why investors are putting more money in the United States stock market while getting out of other countries. In the past six weeks, a net $29 billion has poured into funds that invest in United States stocks, while $13 billion flowed out of those focused on European stocks, according to Bank of America Merrill Lynch. At the start of this year, analysts expected solid growth around the world, but now Europe’s economy is showing signs of weakness, and turbulence has returned to the markets of some developing countries.

 Related: George Soros Sees Another Crash Coming – And Here’s Why

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.