Trade Tension Takes Turn at Top

Key Points
  • Rising trade tensions with China have rattled U.S. markets, but other trade issues may be cooling. Volatility is likely to remain elevated until there is more clarity on trade; but it’s increasingly likely this could be a long slog.

  • Although on the back burner recently, economic data has been mixed and we’re concerned that the longer the trade dispute lingers, the bigger the hit will be to business and consumer confidence.

  • There may be some international locations that are worth a look in the midst of the trade drama, as some areas may be able to stay out of the fray.

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“Guard against the impostures of pretended patriotism.”
― George Washington

We remember

The phrase “trade war” is front-and-center in the news, but this weekend reminds us of the price thousands of American patriots have paid defending freedom in actual wars. We are thankful that we are free to worry about such things as trade, earnings, and market movements, thanks to the courage and bravery of those who have fought and died to keep us free. We remember and honor them, now and always.

Trade takes center stage

With a tweet from the President, trade tensions jumped back to the forefront of investors’ minds, pushing volatility higher and aiding a long-awaited pullback.

Volatility rose as trade tension heated up

VIX short-term

Investors have dealt with a back and forth of rising tariffs from both sides of the U.S.-China trade dispute, with the ball currently in the Americans’ court, as the Trump administration is currently studying whether to raise tariffs on the final and largest tranche of Chinese imports. The near-term impact on the market is easy to see, but determining the longer-term economic impact more difficult. That said, multiple recent studies—including by the National Bureau of Economic Research (NBER) and Goldman Sachs—have basically settled the question of who bears the greatest cost of the tariffs … U.S. companies and their consumers do. At this stage, our friends at Cornerstone Macro estimate a drag on U.S. GDP of -0.30% based on already-imposed tariffs, with a significant 0.4% additional jump expected if the remaining proposed tariffs on $325 billion of Chinese imports are imposed.

Those estimates are largely based on the direct impact of Americans paying higher prices (a “tax”) due to the tariffs. We are also concerned about the hit to corporate confidence and the attendant halting of forward capital spending plans. The consumer-led growth part of the economic cycle is already rolling over; and the hoped-for next leg of capital spending growth is being dashed. For now, despite a modest pullback, business confidence remains fairly high (especially among smaller companies); but most measures haven’t taken the latest rise in trade tensions into account. Already, we’ve seen the ISM Manufacturing Index indicate that manufacturing executives are growing more concerned about the trade uncertainty; with the key leading indicator of new orders in decline. We’ll be watching confidence, and capital spending plans, closely as the trade tensions drag on.

Corporate confidence dented but remains elevated—for now

NFIB Small Business Optimism Index

What is uncertain at this stage is the more dominant trait of President Trump: retaining his self-proclaimed “tariff man” status at any cost, or the desire for a second term as President? The latter would suggest a lofty incentive to reach a deal; however, there are two sides in this battle, and China is making it increasingly clear they are playing a long game and won’t be “bullied” (their word) into a deal. In the meantime, it’s our job to try to assess the economic and market implications of the tariffs to date, without trying to game or forecast an unknowable outcome.
The trade news is not all bad. Earlier this month, the Trump administration announced it was delaying a decision on auto and auto parts tariffs, which would have had added the European Union and Japan to the trade battle. Also, according to our own team in Washington, the formerly-NAFTA/currently-USMCA trade agreement among the United States, Canada and Mexico is at least slightly more likely to be ratified by Congress courtesy of the decision to remove tariffs on steel and aluminum aimed at Canada and Mexico. (For more on trade tensions see Liz Ann’s Street Fightin’ Man: President Trump Ups Trade War Ante article).