By Akane Otani and Ben Eisen
Trade fears have slammed markets around the world, but U.S.
stocks are rising as strong profits and spending lead investors to
overlook the risks of a downturn.
The S&P 500 and Dow Jones Industrial Average have gone up
all but one day since the U.S. and China imposed tariffs on $34
billion of each other's goods on July 6. The S&P 500 is now up
4.8% for the year.
However, international markets have taken a hit: the Shanghai
Composite has dropped 14% for the year, South Korea's Kospi
Composite Index has shed 6.3%, Germany's DAX has lost 2.9% and
Japan's Nikkei Stock Average has declined 0.7%
Some analysts said U.S. markets aren't reflecting possible
repercussions from more trade barriers. Tariffs on steel and
aluminum have already hurt shares of U.S. manufacturers and
producers, even as most stocks have largely been spared.
With the trade tariffs, the U.S. is "shooting itself in the
economic foot," said Richard Bernstein, chief investment officer of
investment adviser firm Richard Bernstein Advisors.
Should global trade slow broadly or the prices of goods jump,
that could in turn cut into spending by consumers and businesses. A
10% rise in import costs could hurt foreign sales and chip away 3%
to 4% from per-share earnings growth, Bank of America Merrill Lynch
analysts found in a report.
"The markets are kind of treating the trade dispute as cheap
talk. That's a bit of a miscalculation from the political risk
point of view," said Mark Rosenberg, chief executive of GeoQuant,
which uses artificial intelligence to project geopolitical
developments and their impact on markets. "There is going to be
some more concrete damage."
The U.S. stock market's resilience amid tense trade talks
suggests investors are viewing trade-related market ructions as
buying opportunities instead of warning signs. The S&P 500,
which fell 0.7% on Wednesday after the Trump administration
unveiled plans to place tariffs on an additional $200 billion of
Chinese goods, rebounded 1% over the following two days, more than
recovering from those losses.
Going back to the beginning of March, when trade feuds flared
up, the S&P 500 has erased daily declines of at least 1% in an
average of 12 trading days, according to the WSJ Market Data Group,
and trading volumes have been relatively muted. By contrast, it
took an average of almost 17 days to rebound in the three years
through February.
The U.S. is in a better position to withstand economic
downturns, some analysts said, even if other countries are hit,
making the U.S. market a relative haven. Even after a nine-year
stock rally, U.S. corporate earnings are strong and consumer
confidence is robust. That stands in contrast to the global growth
outlook, which has cooled as business activity has slowed and a
strengthening dollar has roiled emerging-market debt and
currencies.
Goldman Sachs estimates exports to China make up 1% of U.S.
gross domestic product. That makes it unlikely tariffs will have a
material impact on the earnings growth of U.S. multinational
companies, according to the firm.
"If somebody's going to get hurt if we engage in some kind of
trade war, it's far more likely to be China than the U.S.," said
Mark Grant, chief global strategist and managing director at B.
Riley FBR Inc.
To some, the market's calm also reflects the outlook that
tariffs won't substantially threaten corporate profits. Analysts
remain optimistic about future earnings: Bank of America Merrill
Lynch raised its 2018 and 2019 earnings-growth estimates for the
S&P 500, citing strong U.S. economic data and
better-than-expected earnings in the first half of the year.
"It's pretty difficult to get a really dire economic scenario
just from the tariffs," said Ed Campbell, a senior portfolio
manager at QMA. He said his firm, which is more optimistic about
growth in the U.S. than in the rest of the world, has been skewing
the equities in its multiasset portfolio toward U.S. stocks.
Morgan Stanley researchers found about a fifth of the volatility
in the U.S. stock market since the beginning of March can be
explained by trade risk.
"Trade risk is not systemic across equities," said Brian Hayes,
a quantitative analyst at the bank. "There were idiosyncratic
risks, but it was not affecting the overall market."
Still, some parts of the market are already reflecting
burgeoning unease, investors said.
Investors are pouring more funds into the S&P 500 utilities
sector -- considered a safer bet because of its relatively big
dividend payouts. The sector has risen 8.1% over the past four
weeks, soaring past the broader index's 0.9% advance across the
same period. Shares of smaller, more domestically focused U.S.
firms, which are seen as more insulated from global issues, have
also outperformed, with the Russell 2000 more than doubling the
S&P 500's gain for the year.
The gap between yields on short- and longer-term Treasurys has
narrowed to nearly 11-year lows, something some analysts worry
points to an increasingly murky outlook among investors about
economic growth.
Short-term rates have exceeded longer-term ones before every
recession going back to at least 1975. Analysts are divided over
what the recent flattening of the yield curve signals, with some
arguing it has largely stemmed from short-term interest rates
rising with the Federal Reserve's rate increases and others saying
it reflects the risk that restrictive trade policies will cut into
global growth.
Given the uncertainty, some are projecting a dire scenario if
the trade strife heightens. The S&P 500 could fall as much as
21% to around 2200 if the U.S. and China slap 30% tariffs on each
other's goods and global auto tariffs are levied, UBS analysts
found in a report.
But so far, the markets are "ascribing a very low probability"
of a worst-case scenario panning out, said Keith Parker, chief U.S.
equity strategist at UBS.
"There's too much at stake on both sides to let relationships
deteriorate to that point," Mr. Parker said.
--
Peter Levin
contributed to this article.
Write to Akane Otani at akane.otani@wsj.com and Ben Eisen at
ben.eisen@wsj.com
(END) Dow Jones Newswires
July 15, 2018 19:36 ET (23:36 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.