In the Face of a Looming Trade War

To give you a feel for what's inspiring today's action, here's this morning's entry to our internal market log:


7/6/18 (Friday) 

As I type, 10:52 am, the market is entirely shrugging off the latest tit-for-tat trade actions between the U.S. and China, despite Trump threatening as much as $500 billion more tariffed imports from China if this thing goes the distance.

Here’s what I believe has the market relatively sanguine at this point:

1. Clearly, traders aren't taking that extreme an outcome ($500 billion) seriously.

2. China has made it abundantly clear that it will only match dollar-for-dollar and will not escalate from its end. Plus, unlike past skirmishes with other nations, China, at this point, is not at all fostering ill will toward U.S. products among its consumers.

3. By the numbers, $50 billion of goods tariffed in both directions does not measurably move the needle in terms of either country’s GDP. Plus, further escalation on the part of the U.S. would take some time to pull off. I read a report suggesting that a substantial escalation on our end couldn’t be enforced until well into the fall of this year.

4. General conditions remain notably bullish for the economy and, thus, for corporate earnings and, thus, ultimately, for stock prices going forward.

Here, however, is what bullish short-term traders may be missing in their theses:

1. While Q2 earnings reports are likely to be notably strong overall, forward outlooks are bound to be marred by concerns over trade. Which is abundantly consistent with what the ISM and PMI surveys are reporting, as well as what the Fed minutes suggested is happening among the business contacts officials chat with between meetings.

2. The currently very strong economic data (impressive job growth in the manufacturing sector reported in today’s employment report, for example) may be somewhat punctuated by some pulling forward of activity. I.e., there’s evidence that production ramped up recently in an effort to get business done ahead of looming tariffs. That increased production likely required a pickup in hiring (today’s report), which simply means that we’ll need to be watchful for more evidence of such, as it could explain what may turn out to be a greater future lull than we might’ve otherwise experienced as a result of newly implemented hurdles to trade.

3. The fact that the latest escalation in the “trade war” with China isn’t roiling the market today could embolden the Administration, resulting in an ill-advised confidence that could inspire at least the threat of even greater escalation on the part of the U.S... Of course, ultimately, the market will adjust accordingly (i.e., sharp selloff[s]) if this goes too far, which will highly likely result in a quick reversal (de-escalation) on the part of the Administration.

For our purposes, general conditions continue to point to minimal recession risk in the foreseeable future, therefore inspiring us to stay the course with our overall allocation, while tweaking our sector mix as evolving idiosyncrasies therein dictate.