Washington Insider: Shrugging Off Trade Fights May No Longer Be Option for Wall Street

The New York Times says this may well be the time when things change—that is, the point at which “investors have to start taking President Trump’s trade wars much more seriously.”It argues that fears about trade have at times weighed on stocks since mid-February when the administration announced tariffs on steel and aluminum – but the Standard & Poor’s 500-stock index is up nearly 9% this year and much of those gains have come in the past two months. The stock market hit a record high last week, the Times says.Still, it feels that the trade conflict between the United States and China may be on the verge of a sharp escalation. Bloomberg reported last Thursday that President Trump wanted to go ahead soon with tariffs on $200 billion of Chinese products, adding to those already imposed on $50 billion of goods—and that likely got much wider market attention, the Times thinks.It says that investors may have viewed Trump’s threats since February as negotiating tactics and believed that he would be content with limited gains especially over the past week when the White House worked toward a trade deal with Mexico and possibly Canada “that does not appear to radically remake the North American Free Trade Agreement.”However, there is growing unease among investors, the Times reports. Fund managers have ranked trade as their primary concern over the past few months and as presidential statements have turned into action, some have positioned their investments for slower economic growth.Still, last week’s NAFTA negotiations sparked a rally in stocks, suggesting that “investors might not want to draw too much from the talks.” Mexico and Canada are predisposed to compromise, given their huge dependence on the United States market. In addition, the European Union, which typically takes a hard line in trade negotiations, has not agreed to anything yet.China also relies on the U.S. market, the Times says, but its leaders can offset the impact of $250 billion in tariffs by measures like stimulating their economy and bolstering exports by letting China’s currency slide.China could also step up its retaliation against the United States, which may hurt American companies — and could put the recent stock market gains at risk. This summer’s rally has made stocks more expensive, which in turn makes them more vulnerable to negative news.A key question, the Times says, is how far stocks could fall if the trade conflict intensifies. The report cites a few underlying stock market numbers for guidance.The S&P 500 is now trading at 17 times earnings analysts expect over the next 12 months. The lowest valuation on the index during the trade tensions this year was just over 16 times expected earnings. The benchmark would have to fall more than 5.5% to trade at that lower multiple.A moderate market reaction to a stepped-up conflict with China may be justified by these conditions given the uncertainty surrounding the negotiations. But any sign that the conflict could hit corporate earnings would deepen worries about future profits. If recent earnings boom that drove stocks to new highs falters, the S&P 500 would be at risk of a steep decline.Investors may comfort themselves with the thought that Trump may not want to risk a stock market rout ahead of the midterm elections—and on Thursday the President said, “for all of you that have made a fortune in the markets, or seen your 401k’s rise beyond your wildest expectations, more good news is coming!” Investors now have to decide whether a much nastier fight with China fits into that bullish narrative, NYT says.But the Times thinks it is time to point to some market vulnerabilities and to note that the President’s message that trade wars are “easy to win” is facing increasing skepticism across commodity groups and others as the stakes continue to climb and trading partners continue to push back on U.S. policies. These are developments producers should watch closely as they intensify, Washington Insider believes.