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Trade War: Why the Stock Market Isn’t Worried

Posted On June 29, 2018 1:04 pm
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But there are few signs in the United States that anxiety about trade is causing a significant pullback in business spending. “We really don’t see it in the numbers,” Jerome H. Powell, the chairman of the Federal Reserve, said last week. “It’s just not there.”

Economists are not forecasting big hits to the United States economy from the trade policies either in effect or imminent. Goldman Sachs’s economists predicted that the $50 billion of tariffs against China would shave no more than two-tenths of a percentage point off gross domestic product after two years.

Investors may also believe that this period of high tension and tariff threats are the prelude to some sort of deal. The decision to extend a lifeline to ZTE, the Chinese electronics firm subject to United States penalties, showed that the Trump administration and its Chinese counterparts are capable of agreement.

Of course, the trade war could escalate instead. Mr. Trump has threatened to impose an additional $100 billion of tariffs on China, which would most likely retaliate with its own tariffs. That would do more economic damage and cause some nervy days in the stock market, but not necessarily calamity, said Brad W. Setser, a fellow for international economics at the Council on Foreign Relations. Countries, he said, have ways to soften the blow. “You would start to see some real disruption and higher short-term costs but not the sort of costs that would trigger a recession” in either the United States or China, he said.

Still, there are signs of fear lurking in the stock market.

The S.&P. 500 remains below its peak hit in January, and some analysts say the trade tensions may be holding it back. “Why hasn’t the overall market made a new high considering all the fiscal stimulus?” David Rosenberg, chief economist at Gluskin Sheff, said. Stocks of technology companies and smaller companies have done particularly well in recent weeks, indicating that investors right now are drawn to companies that are less vulnerable to trade wars, Mr. Rosenberg added.

Also, it is too early to conclude that the United States can mostly shrug off trade battles. Many American businesses have operations abroad or get a large share of their revenue from foreign markets. The retaliation by other countries has barely begun.

Tariffs push up the costs for businesses, which in turns crimps their profits. If companies start to warn that profits will come in below expectations because of trade, the stock markets in the United States could decline sharply.

Home-building companies provide an example of what might happen. United States homebuilders face a range of rising costs. One of them is they have to pay more for Canadian softwood lumber after the Trump administration imposed tariffs of 20 percent on that product last year. The Standard & Poor’s index for stocks in home-building companies is more than 10 percent below its recent peak.

The United States economy could start to disappoint. Interest rates are rising, in part, because the United States federal government is borrowing large sums to cover the fiscal shortfall that resulted from the recent tax cuts. Higher interest rates can quickly crimp growth. This may happen as the economies in Europe are wobbling and those of several large developing countries are showing signs of stress. “There is reason to suspect that we slow the pace of growth in the second half,” said James W. Paulsen, a stock market strategist at the Leuthold Group.

 Related: Bank of America is Scared of This Number – And You Should Be, Too

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.