It’s official: Trade wars are bad for stocks.
Since the latest round of trade tensions broke out a couple of weeks ago, markets have headed down, down, down.
Friday’s 163-point advance in the Dow Jones Industrial Average followed eight consecutive days of decline. Had the Dow closed down Friday, it would have been its worst stretch in four decades. The Industrial Select Sector SPDR ETF (XLI) is down around 10% from its late January peak. Leading U.S. exporter Boeing, which nearly doubled last year, has slid almost 10% since June 12th.
Chinese stocks, which would surely feel the brunt of any extended trade war with the U.S.. are off around 20% since late January, another cyclical bear market within Shanghai’s 11-year, “secular” bear.
As I wrote in MarketWatch this week, China has dragged emerging markets ETFs down, too. (GoldenEgg Investing® has never recommended emerging markets, because in the long run they give you lower return than from U.S. stocks, and at higher risk.)
President Donald Trump, who thinks all the trade deals negotiated by previous presidents sold America down the river, has threatened full-fledged trade war, not only with China but also with Mexico, Canada and the European Union.
Trump often talks big but then backs down (his slogan could be “speak loudly and carry a small stick”). Is it for real this time? And what effect could a genuine trade war have on the markets and economy?
We’ll find out pretty soon. On Friday the EU will slap $3.4 billion in tariffs on U.S. goods, and in two weeks the U.S. is slated to impose tariffs on ten times that amount of Chinese imports. China has vowed to retaliate immediately.
Thus far, the skirmishes have been settled quietly, if not quite amicably. Trump caved to Chinese president Xi Jinping and allowed Chinese electronics maker ZTE, which broke sanctions against Iran and Korea, to stay in business with only a slap-on-the-wrist fine.
But the potential for escalation is high. There’s no love lost between Trump and former U.S. allies, and he’s obsessed with showing the basest of his base that he’s “tough” and “strong,” a word he used repeatedly when he, again, caved on the disastrous policy of separating immigrant children from their parents. A president who constantly needs to show how tough he is may well push this trade battle beyond the brink.
This week, Morgan Stanley’s chief economist Ellen Zenter said, “Supply chain disruptions and other secondary effects [of trade wars] such as tightening of financial conditions could…adversely affect economic growth.” It could also drown out what’s expected to be another great earnings quarter, and rather than push stocks higher, would instead drag them down, down, down.