Markets have been on edge for weeks, and it appears with good reason. President Trump is reportedly putting the finishing touches on a major trade tariff package that is directed at China (to the tune of $50 bn). The focus of the tariffs are on metals. In response, China is planning its own set of tariffs on US agricultural exports, especially from Farm Belt states.
FINSUM: So the US is negotiating exemptions with top allies, but is starting a trade war with China a good idea? The politically difficult aspect for Trump is that China’s retaliation against US agricultural exports will hurt the states that helped elect the president.
Many investors might be thinking that small caps look like a good buy at the moment. Between trade tariffs, the new tax package, and the president’s general focus on economic nationalism, small caps seem to have a lot of wind in their sails. But the big question for investors should be whether they are overvalued. The Wall Street Journal says the asset class is overvalued, as the market has gotten overly optimistic about small cap growth prospects and is valuing the stocks too richly versus their current earnings, especially given rising interest rate risk in the economy.
FINSUM: The WSJ used an unusual valuation metric to assess the sector (EV/EBITDA), but overall the sector looks richly valued. So is every other asset class.
Wall Street is getting nervous about the changes occurring in the White House. Over the last week, President Trump has lost or fired both Gary Cohn and Rex Tillerson, former Goldman Sachs COO and former Exxon CEO, respectively. Both Cohn and Tllerson were considered the business-friendly part of Trump’s White House who would look after corporate and investor interests. With them gone, investors are betting the odds of a trade war are getting more likely. One equity strategist summarized the situation, saying “We’ve gone a long time with a zero percent chance of a trade war, it’s now higher than that -- probably significantly higher than that … The internationalists have lost and the nationalists have won”.
FINSUM: We agree that a trade war is getting more likely. If it occurs, we think it will be poor for equities markets, but not necessarily terrible for the economy.
The markets have been running scared all week. The Dow has lost over a 1,000 points, and much of the concern seems to be centered on global trade. One of the key reasons why is that President Trump is planning to raise tariffs on steel and aluminum. Trump sees trade wars as “good, and easy to win”. This view has investors worried about a disruption to status quo global trading patterns.
FINSUM: So Trump’s quote was not fully reported by most, and actually reads “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win”. Frankly we think the US has gotten the raw end of many trade deals over the last few decades and can throw its weight around much more to get a better deal.
There has been a lot of talk lately about a coming US and global trade war. A lot of the focus has been on China, but also NAFTA. Well Bloomberg says the idea of a looming trade war is wrong, because it is already here. Over the last few months the US has already added some stiff barriers to trading with Canada. The moves show that the US is not afraid to throw up tariffs even in trading relationships that are pretty balanced.
FINSUM: Trump and the US government are now taking a very firm line on trade by increasing tariffs and launching investigations into potential violations. We like the idea of the making US trade more fair after years of undermining ourselves, but do have some concerns it could backfire in the long run.