For months, trading in the U.S. stock market has been largely dictated by trade policy, as investors weigh every seeming escalation of tensions between the U.S. and its major trading partners, and attempt to suss out what potential changes could mean for the global macroeconomic environment.
So far, the impact on equities hasn’t been too severe. While some sectors have seen significant hits, like the multinational industrial and material industries, the broader market has been essentially rangebound for months. The Dow Jones Industrial Average
DJIA, -0.03%
and the S&P 500
SPX, -0.03%
have been volatile of late, but they remain not too far from where they were before the issue flaring up, as the headwind that a trade war would represent is weighed against its likelihood, and the tailwinds that come from positive factors in the economy, such as improving corporate earnings and a strong labor market.
Over the past several months, President Donald Trump and his administration have announced several tariffs and threatened many more, and these have often been met by retaliatory measures from other countries. According to Morgan Stanley Wealth Management, Wall Street analysts have generally decided that “all told, the implications for the economy and markets are modest and not likely to shave more than a few tenths of a percent off global and regional GDP growth.”
Read: Trade-war tracker: Here are the new levies, imposed and threatened
Lisa Shalett, the firm’s head of investment and portfolio strategies, said that while she didn’t dispute this math, such analyses may not fully account for the risk that an escalation in trade tensions could represent for the global economy.
The estimates for modest impacts “don’t sufficiently capture the broader context and the reality of the policy change around globalization and the risks associated with America’s increasingly aggressive position on trade,” she wrote in a note to clients.
In her view, the impact of trade goes beyond the individual negotiations being held between the U.S. and its largest trading partners, such as China, Canada, and the European Union.
“Rather than a series of bilateral negotiations, we see a multifront trade confrontation,” Shalett wrote. “The battlefields are now extending to our borders, with Canada and Mexico, as well as to our historic allies, the G-7 countries, trampling existing free-trade pacts and inviting retaliation. With uncertainty rising, we no longer believe that the implications of Washington’s trade talk are benign. What’s more, this intensified headwind to growth may be coming just as growth momentum in global trade has started to wane.”
Analysts have increasingly grown concerned that the U.S. economy is in the late stage of its economic cycle, with expectations for future returns at their lowest level since before the financial crisis as markets grapple with “the end of easy,” in terms of the investment environment.
Even outside from the issue of a potential trade war, it is facing such headwinds as Federal Reserve policy growing less accommodative, a flattening yield curve, and signs that cracks are appearing in the once-synchronized growth of the global economy. The number of analysts who expect the global economy to be stronger a year from now compared with today has dropped precipitously in 2018, and currently stands at its lowest level since February 2016.
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Nicholas Colas, co-founder at DataTrek Research, on Tuesday wrote that “growing fears of an economic recession” would be the dominant market narrative for the second half of 2018. That issue is heavily influenced by what happens with trade.
“Even though corporate earnings are +20% in 2018 because of lower tax rates, managers may start to reduce hiring and capex plans if they begin to fear the impact of a trade war on their business,” he wrote. “Spook them enough, and they will start to reduce headcount. That could turn into a self-reinforcing cycle that ends up in recession.”
Read: Capex is starting to ramp up, but will it make a difference for stocks?
Source : MTV
