Stock Market Shrugs off Trump’s Trade War

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President Donald Trump. Justin Sullivan/Getty Images
President Donald Trump. Justin Sullivan/Getty Images

washingtonpost – What trade war? Investors on Monday continued shrugging off fears that President Trump’s escalation of trade hostilities will put a dent in share prices.

Indeed, on just the second trading day since the United States and China each slapped tariffs on $34 billion of imports from the other, the Dow Jones industrial average recorded its best day in a month. The index leaped 1.3 percent, turning positive for the year and beating its 50-day moving average for the first time in three weeks. It was the Dow’s third higher close in a row.

The performance suggests that trade jitters, which have stalked a shaky stock market all year, won’t easily overwhelm a focus on solid economic fundamentals. The underlying strength of the economy was on display in Friday’s stronger-than-expected jobs report, with 213,000 jobs added in June along with upward revisions for April and May. Investors expect the good news will continue rolling in as the second-quarter earnings season kicks into gear.

Market watchers say investors aren’t ignoring the threats posed by Trump’s budding trade fights. Rather, most are assessing that the Trump administration is still just maneuvering for leverage and won’t follow through with the full raft of tariffs the president has threatened.

“On balance, it’s a reason to be less positive,” says Ed Clissold, chief U.S. strategist at Ned Davis Research. “But at the end of the day, do we think this is going to turn into a major trade war that’s going to cause a major recession? That doesn’t appear to be the case. Part of our thesis is that President Trump’s negotiating style has been to start with a strong position.”

More Trump-driven uncertainty is on tap when the president heads to Brussels for a NATO summit meeting that starts Wednesday. He will then go to London to meet Brexit-addled Prime Minister Theresa May, then on to Helsinki to huddle with Russian President Vladimir Putin. Trump linked his trade dispute with the European Union to his gripes about the military alliance in a pair of tweets on Monday morning:

But slowing global growth should keep a lid on trade tensions, says Brian Belski, chief investment strategist at BMO Capital Markets. That, he said, is because other trading partners can’t afford to become the aggressors in a trade showdown with the U.S. “We believe other countries won’t take the lead because it would be more debilitating to their economies,” he says. And Trump, meanwhile, is simply “trying to force a reversion to the mean” by lowering trade barriers abroad. “It’s our view that there’s an excessively low likelihood the president will enforce all the tariffs he’s talking about.” (See The Washington Post’s tariff tracker here for a tally of how the levies now in force on $85 billion worth of imports compares to those that Trump has threatened.)

“We understand that the trade war is producing lots of collateral damage in specific sectors – to soybean farmers in the Midwest, and U.S. manufacturers who are dealing with supply chain disruptions and higher costs,” Horizon Investments chief global strategist Greg Valliere wrote in a Monday note. “We also understand that the trade war could get much more serious if Trump carries out his threat to impose massive new auto tariffs or blockbuster new tariffs against China. Yes, this could get worse before it gets better, but for now the financial markets – especially in the U.S. – are focusing on earnings and interest rates, both of which look just fine despite the global uncertainties.”

The recent run-up in small-cap stocks, which have lower exposure to trade, suggests some investors are looking for a haven in the event the conflict intensifies, as The Wall Street Journal notes: “The S&P Small Cap 600 is up 13% on the year, while the S&P 500 is up 4.1%.”

But in the feedback loop between a stock market and a White House that each keep a keen eye on the other, investors’ relative steadiness could send the wrong message to the administration.

Commerce Secretary Wilbur Ross insisted last week that the Trump team won’t balk from its trade push in the event of a steep stock sell-off. Yet two weeks ago, as trade fears dragged the Dow below its 200-day moving average for the first time since the Brexit vote, White House trade czar Peter Navarro turned up on CNBC to offer reassurances that prompted a late-session rally.

Now, investors are betting Trump’s trade volleys will amount to more talk than action; doing so, they risk giving the president a green light to press forward with tariffs that rattle more than markets.