Are we moving to a post-trade-war world?
Is it possible? After two years of conflict, of on-again/off-again trade talks between the U.S. and China, could we finally be moving towards a post-trade-war world?
Investors initially expected a quick resolution to the dispute. That didn’t happen. So now for more than a year they’ve been whipsawed by the headlines – new tariffs, counter-tariffs, postponed meetings, and midnight tweets. But in the most recent round of talks held in the U.S. in early October there seemed to be some movement back towards the center. The logic that investors had flagged early on – the mutual benefit of having some kind of agreement – appeared to finally take hold.
For the U.S., and President Trump in particular, next year’s election is looming larger every day. Farmers and manufacturers have been hurt by the dispute, and consumers are likely to start feeling the pain of the latest round of tariffs. For his part, President Xi sees China’s economy slowing. So both sides have compelling reasons to call a truce.
Of course we’ve been down this road before only to see things fall apart at the last minute. But assuming that this time is different, and there are good reasons to think that it is, what does this mean for the markets? Trade has been a major overhang for global growth, impacting not just the U.S. and China, but Europe and emerging markets as well. Germany, a major exporter, is close to, if not already in, recession as manufacturing output contracts. More than any particular tariff, the uncertainty caused by the ongoing friction has weighed on corporations and investors. Easing that uncertainty would be a good first step towards normalizing global trade relations and restoring growth.
Markets have generally rallied on good trade news, and the latest developments are no exception. Both equities and U.S. government bond yields pushed higher. Investors, for their part, have been moving to the sidelines, withdrawing $60 billion from stock funds in 3Q, the most since 2009, according to Morningstar. Reactions in the currency market are harder to predict. The Wall Street Journal Dollar Index has generally risen over the course of the year but has bounced around a little this month, falling from 91.99 on September 30 to 91.49 on October 14.
As we have said many times, market timing is a tough strategy to execute since it means getting both out and back into the market at the right moment. Liquid alternatives are one way to keep market exposure while working to manage portfolio volatility. Events have a tendency to move quickly and unpredictably these days, especially on the trade front. While China has been the main event, Brexit has also caused its share of drama. As of this writing, there’s another Brexit agreement on the table, too, though there remains some doubt that it will pass muster with the British Parliament. The outcomes of all this will in turn impact growth, currency relationships, and, ultimately, stock valuations.
For our part, we are hopeful that the economy will continue to muddle through and that some kind of U.S.-China and Brexit trade agreements – even if they’re less than optimal – will ease tensions enough to support further growth. If we are heading into a post-trade-war world, multiple assets classes could potentially benefit, including commodities, small cap, and international. But as we’ve seen more than once, when it comes to trade it’s not over until it’s over. So, stay tuned.
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