A lot of investors may be asking themselves whether stocks will be directly impacted by a trade war. In the last several trading days, the market seems to have shrugged off the increasing trade tensions. However, JP Morgan is warning that the burgeoning trade war may wreak havoc on the market. The rising tariffs now occurring globally follow 50 years of increasing free trade, so there is little modern precedent for what is occurring.
FINSUM: In our view, the market does not have a good feel for pricing the risk of a trade war because it has been so long since investors have seen anything like it. Beware.
Investors look out, it is time to go on the defensive, at least according to JP Morgan. The top strategist at JPMorgan Asset & Wealth Management, Michael Cembalest, has just told investors that the growing trade war and its threat to markets and the economy means investors need to be very worried. Cembalest points out that this will be the first sustained rise in tariffs across the global economy in 50 years and it is a profound shift away from decades of historical precedent. If the US proceeds with a further $200 bn tariff package on top of its $34 bn package, then markets could be in for a wild ride, says JP Morgan. They advise to focus on consumer staples and tech stocks.
FINSUM: This is a pretty stark warning from JP Morgan and it does make sense. Because there is little recent precedent for trade war, the market may not be accurately pricing the threat it poses.
It was only a matter of time until US industry started to feel the pain of the current American-led trade war. Now it is happening. US manufacturers are reporting rising costs and difficulties in sourcing ahead of the tariff deadline. These companies say that the metal tariffs, combined with the threat of falling export business, all caused by tariffs, is threatening to make them stop hiring or making new investments. “We had a good year last year, and we’re in the middle of a good year this year. But we are very concerned about the tariffs”, says an Ohio manufacturer of excavation equipment.
FINSUM:That penultimate sentence is the most scary of all—that manufacturers may stop hiring and investing. That would be a leading indicator of a coming recession, especially if it has a trickle down effect to other sectors.
In what seems to be a perfect study in the law of untended consequences, the government’s new focus on tariffs are driving US manufacturers out of the country. American motorcycle maker Harley-Davidson (side note: can you think of a company more American than Harley-Davidson) has announced it will move some production off-shore because of retaliatory EU tariffs on American motorcycles. Europe is one of the biggest consumers of US products, including for Harley, and the company does not want to lose market share by raising prices for European consumers.
FINSUM: This is the downside of a trade war. Trump wants to have more US manufacturing jobs at home, but retaliations can cause perverse economic incentives to move manufacturing overseas.
The Dow had a very ugly day yesterday, as did the Nasdaq and S&P 500. However, that might just be the beginning, argues Barron’s. Markets plunged as Trump escalated the trade stand-off with China and other US trading partners, including limiting Chinese investment in American technology companies. And while markets have been looking at a possible trade war for months, it seems as though they have not fully priced in one of the magnitude which now looks to be emerging. According to one analyst, “Markets are starting to price in the possibility of a trade war with China, however, I would argue that a true trade war–one that drives us into a worldwide recession–would lead to a 20% or more drop in prices, so we haven’t priced one in yet”.
FINSUM: This is a very ugly, but realistic, prediction. We are increasingly worried about the direction of the international dispute on trade.