The stock market keeps shrugging off trade war
Even though Federal Reserve Chairman Jerome Powell has mentioned ongoing antagonism between the U.S. and its trading partners as a risk to the economy, the tech-heavy Nasdaq Composite is pushing to new record highs. The index's Wednesday close at 7,932 puts it within range of the 8,000 level. Large-cap stocks, as represented by the S&P 500, are closing back in on their January high.
Investors seem immune to the raucous headlines, though news late Wednesday that President Donald Trump and the European Union's Jean-Claude Juncker agreed to some tension-lowering adjustments helped all three major U.S. indexes to end on high notes. Indeed, Mr. Trump touted on Twitter recently that "tariffs are the greatest!" as he prepares another round on $100 billion in Chinese imports (adding to the higher tariffs on $50 billion in imports already on the way).
And General Motors has joined Harley-Davidson in warning that tariffs will pinch profits. In addition, China has nixed the new "innovation hub" Facebook was trying to set up there -- just hours after regional regulators approved the move. That means the social media giant continues to be iced out of the Middle Kingdom.
Why haven't investors freaked out? Likely because, as things stand now, the proposed tariffs will have only a modest impact on U.S. GDP growth. (An across-the-board hike in auto tariffs would be another story, however.)
Hedge fund manager Dan Loeb recently warned that investors were being a little too blasé, noting that since 2000, 100 percent of the profit margin growth in the S&P 500 companies has come from manufacturers. And global supply-chain efficiencies have generated between one-quarter and one-third of the current U.S. economic expansion. A protracted trade war that results in higher labor and material costs threatens all of this.
Overall, Goldman Sachs calculates the U.S. has already imposed tariffs on $79 billion in imports and is proposing higher levies on an additional $702 billion. The combined total would represent 27 percent of all U.S. imports. Focusing just on tariffs, Goldman estimates that a 10 percent across-the-board tax on all imports would cut S&P 500 profits by 15 percent.
Painful, sure. But not catastrophic.
Goldman has already noted that the current spat has deepened from a trade war to a currency war amid dramatic weakness in the Chinese yuan (and President Trump's apparent efforts to weaken the U.S. dollar). It's also worried that the next phase will involve government intervention in the guise of encouraging consumer boycotts. Beijing deployed this tactic against Japanese automobiles in 2012 and against South Korean products in 2017. The EU has enacted targeted tariffs on things like Kentucky bourbon.
Last week, China issued a temporary injunction on some chips from Micron, sending its shares down more than 10 percent from their recent high. Just imagine the hit to Apple if Chinese consumers suddenly viewed iPhones as unpatriotic. Last quarter, the iPhone X was the most popular phone in China, helping the company to its best performance there in 10 quarters.
Here's another concern: The headline indexes' strength masks growing concern in many other parts of the stock market -- parts that are smaller and thus carry less weight in the big indexes' performance compared to big-cap tech stocks that have been driving prices higher in recent months.
Indeed, Capital Economics noted that a third of the 24 industry groups in the S&P 500 have fallen since the middle of June, with the worst-affected including sectors -- such as semiconductors and automobiles-- that are particularly vulnerable to the trade measures already proposed.