We’ve been talking for a while about consequences of a trade war but American investors, thus far, have been immune to the effects. It doesn’t seem to matter what growth is because the stock market is hitting all-time highs. There are a variety of reasons for the stock market advance occurring (and we’ll review them later), but the primary question is this: is trade policy having any effect at all? Is this all a lot of worry and bluster, but no real world consequences are borne out?
In short, no. Other countries are already getting squeezed. China’s economic growth in the second quarter (6.2%) is as low as it has been for the past 30 years. China’s growth rate is also trending downwards while global growth is also slowing due to the increased uncertainty. But it’s not all bad news in China. As an emerging market economy, China’s GDP is still over 6% - a number which is almost impossibly high for any developed market to achieve. Also, China’s stimulus efforts can mitigate a short term trade-skirmish; June data on retail sales and industrial production is outpacing analyst estimates.
While other key economies are facing pressure from uncertainty in governance (e.g. Britain) and trade policy (e.g. Germany), the US continues to march upward, for now. In the short run, stock markets can advance on sentiment and projections, but real world earnings still determine stock price in the long run. The stability of global earnings is predicated on levels of growth which are going to be more difficult if international commerce slows. The market is signaling optimism that we can resolve problems before there is a long term impact on earnings; we simply aren’t sure.