Stocks Slump Amid Tariff Slugfest
The major stock benchmarks sharply fell today, as trade punches and counter-punches dominated the headlines. It begs the question: how big a threat does all of this chest-thumping really pose to the global economy?
Below, to shed light on the question, I highlight calculations released this week by analysts at JPMorgan Chase (NYSE: JPM). But first, let’s see how the markets fared today.
The markets closed early, ahead of the Fourth of July holiday. But there were no fireworks on Wall Street. The equity benchmarks closed in negative territory, with technology and financial shares falling the hardest. “FAANG” stocks took a beating.
Once again, the tussle over trade sapped investors of their confidence.
The trade war already is wreaking havoc in the form of reduced trade volume, canceled orders, flagging manufacturing activity, disrupted supply chains, and lost stock market valuation.
Since June 12, worries over trade have wiped $1.5 trillion off the MSCI All-Country World Index.
Chinese shares are at least 20% of their peaks. The Shanghai index fell 2.5% on Monday and was down more than 1% on Tuesday morning. It recovered later in the day to post a slight gain of 0.4%.
The yuan, which has served as a rudder of stability during the emerging market sell-off, has weakened in recent weeks to its lowest level since August. The yuan continued its slump Tuesday, raising unpleasant memories of previous currency-triggered market routs.
Addressing potential trade war damage to come, JPMorgan Chase released these three scenarios:
1) The U.S. is assumed to raise tariffs on all imports by 10 percentage points, with no retaliation.
2) U.S. tariffs trigger commensurate retaliatory measures, with other countries that are the targets of U.S. tariffs imposing a 10-percentage-point increase in tariffs on imports from the U.S.
3) The entire world raises tariffs by 10 percentage points.
The following chart fleshes out each scenario, in terms of the percentage hits that the global economy would receive. It’s not a pretty picture:
America First… investors last?
The protectionists who view America as a trade victim hold sway in the White House. The free traders were shown the door.
This political reality was underscored again today, as the Trump administration moved to block China Mobile (NYSE: CHL) from offering services to the U.S. telecommunications market, recommending that its application be rejected because the firm supposedly poses national security risks.
With a market cap of $181.3 billion, China Mobile is the world’s largest telecom carrier with nearly 900 million subscribers. The White House is asking the Federal Communications Commission to deny the state-owned Chinese firm’s 2011 application to offer telecommunication services between the U.S. and other countries.
Chinese foreign ministry spokesman Lu Kang, in response to a question about China Mobile, said today: “We urge the relevant side in the United States to abandon Cold War thinking and zero sum games.”
The White House’s move against China Mobile occurs amid rapidly escalating trade frictions between the U.S. and China. Trump is set to slap tariffs on $34 billion worth of goods from China, effective Friday, July 6. Beijing has vowed to swiftly respond with retaliatory tariffs.
In his continuing war against the perceived evils of “globalism,” President Trump also attacked the World Trade Organization (WTO).
Trump on Monday warned the WTO: “We’ll be doing something!” Details weren’t forthcoming, but Trump and his team are convinced that the WTO sides too often with other countries at the expense of the U.S.
Trump’s threat against the WTO came only a few hours after the European Union said that U.S. automotive tariffs would hurt America’s own vehicle industry. U.S. auto makers issued the same warning this week.
Trump and his team don’t believe in multilateralism and trade accords. They don’t even trust America’s closest allies. Trump on Monday blasted NATO for not spending enough on its defense. At least one person is delighted with the fracturing of the western alliance: Russian President Vladimir Putin. An unfettered Putin should worry investors.
Do some countries play rough on trade? Without a doubt. Countries such as China need to be held accountable on many issues, especially the misappropriation of intellectual property from U.S. tech firms. But do tariffs work? Never. History is quite clear on this.
Since 1945, capitalism has spread prosperity around the world through the use of diplomacy, free trade pacts, multinational negotiation, the reduction of trading barriers, and unshakable friendships among key western democracies. America has taken a wrecking ball to this post-World War II order. For much of 2018, Wall Street shrugged off trade tensions as empty bluster. Now it’s getting scared.
Investors who think that somehow this trade war can be “won” know nothing about the lessons of the past. The world stumbled into this dark valley before, in the 1930s. The parallel is worth pondering, during your Fourth of July festivities.
Enjoy tomorrow’s holiday. I’ll be back with Mind Over Markets on Thursday. In the meantime, what’s your best investment? Quality time with your family. It pays lasting dividends.
Tuesday Market Wrap
- DJIA: -0.54% or -132.36 points to close at 24,174.82
- S&P 500: -0.49% or -13.49 points to close at 2,713.22
- Nasdaq: -0.86% or -65.01 points to close at 7,502.67
Tuesday’s Big Gainers
- Juniper Pharmaceuticals (NSDQ: JNP) +31.61%
Drug maker targeted for buyout.
- Veon (NSDQ: VEON) +13.39%
Internet firm sells its stake in telecom.
- Nightstar Therapeutics (NSDQ: NITE) +6.34%
Biotech’s gene therapy looks promising.
Tuesday’s Big Decliners
- Black Box (NSDQ: BBOX) -62.96%
Computer networking provider mulls bankruptcy.
- Micro Focus International (NYSE: MFGP) -7.98%
Software group sells chunk of business to support troubled deal.
- Gemphire Therapeutics (NSDQ: GEMP) -4.67%
Analysts turn bearish on biotech’s lead drug.
Letters to the Editor
“Is the bull market running on empty?” — Jordan S.
As long as the global economy moves ahead (albeit fitfully), high-quality stocks still have room to run. Avoid overvalued, mega-cap “story stocks,” such as those that tanked today, and look for reasonably valued smaller stocks that have less exposure to overseas trade conflict.
What are your views of the trade war? Let’s hear them: firstname.lastname@example.org
John Persinos is managing editor at Investing Daily.