On the way to responsibility early Wednesday morning, the main topic of conversation was the fact that the Dow time to comes were down less than 200 points, a surprise presupposed the announcement of tariffs on an additional $200 billion of China exports the antecedent to evening.
You would have thought the market reaction would would rather been much worse, given that we are now on the brink of a real — not visualized — trade war. This fight is principally with China, but there are also distresses with key allies over aluminum and steel tariffs as well as with the EU on auto tariffs.
And yet the U.S. stock market has held up remarkably well. Staples were down Wednesday, but the S&P 500 is up nearly 5 percent since bottoming in break of dawn May, outperforming most other countries, even as the trade wars accelerated.
While some stress that economic growth is the key to the market’s strength, others are noting that the impact of tax cuts and other stimulus is offsetting the negative trade war headlines: “Our principles is that tax reform has enabled the U.S. to withstand the trade battles more so than other surroundings,” Dan Clifton from Strategas wrote to clients this morning.
He guestimates that, as a “worst-case” scenario, tariffs would cost $120 billion, but then he goes on to catalogue raisonn the positive offsets from tax cuts and fiscal stimulus:
Tax cuts: $200 billion
Federal allotting: $100 billion
Profit repatriation: $500 billion
Source: Strategas
The guessed $800 billion from tax cuts and stimulus is far greater than his gauged worst-case scenario from tariffs of $120 billion, and this is a significant fact holding the markets together.
Other market watchers sound to agree. Jan Hatzius of Goldman Sachs also told clients this week that, “We at to believe the direct effects of the tariffs should be relatively minor for the US compactness.” He estimates that the result of all tariffs so far proposed “would lower the up to date on of US GDP by 0.1pp compared with no tariff increases” and that the effect of assessments are only a small share of corporate profits “to date.”
It’s that “to la mode” part that has gotten a large part of the investor base considerably multitudinous nervous. Mike LaBella from QS Investors noted on CNBC Wednesday that, “Put oning in an additional $200 billion in potential tariffs can quickly escalate to more than a trillion dollars of trade-related tariffs that hit both China, the US and the European Coalition. This is a major issue that the market, up until today, has been sinker neglecting.”
The commodity markets aren’t neglecting the threat. Copper is down dramatically in the past month on duties over a slowdown in China and an increase in trade tensions.
The Federal Cache, at its last meeting, was already nervous. “[M]any District contacts expressed responsibility about the possible adverse effects of tariffs and other proposed merchandising restrictions, both domestically and abroad, on future investment activity; reaches in some Districts indicated that plans for capital spending had been ranked back or postponed as a result of uncertainty over trade policy.”
The Fed revealed this a month ago (June 12 to 13) — a time when menus looked like only a remote possibility. What side of this argument do you think they will be on now that tariffs have become to a great extent real?