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US stock markets well-positioned to weather any trade war storms
Trade war fears have rattled US markets this year – but despite these worries, they have continued to post gains.
The S&P 500, the US’s main benchmark index, and the Nasdaq index of leading technology shares, retreated from their bull run following President Donald Trump’s decision to impose tariffs on steel and aluminium imports in May, but investors soon shrugged off the announcement.
The US is imposing tariffs of 25pc on steel from the EU, Canada and Mexico, and 10pc on aluminium. Meanwhile, other trading partners, including Brazil, South Korea and Australia, will face quotas on metal imports.
The muted stock market reaction, according to some commentators, may be due to the proposals not being considered to have a large enough impact to stall US economic growth. May’s jobs report topped expectations, providing a welcome boost to the economic outlook. However, the impact of rising trade tensions has yet to fully filter through, with the outcome depending on how trade partners respond, and whether there may be larger trade battles ahead.
Canada is among those that have announced retaliatory measures, with tariffs on US steel and aluminium. Meanwhile, other geopolitical issues continue in the background that could affect the US, such as strained US-Iran relations.
Yet Trump’s pro-growth stance has continued to boost financial markets, despite some risk factors that threatened to take the steam out of the stock market bull run.
It’s not only trade wars which could affect markets. The US Federal Reserve voted on June 13 to raise US interest rates by 0.25pc – the second increase in rates this year.
Further increases could affect market movements, with higher rates typically having a negative effect on technology and consumer discretionary stocks, as consumers often find themselves with reduced disposal income once borrowing costs increase.
Despite the above, the US remains the world’s largest economy and is in a strong position to weather potential storms, such as a trade war.
US stock markets have soared over recent years, comfortably beating the returns available in the global stock markets elsewhere.
The passing of the Republican Party tax reform legislation has helped push US stocks higher over recent months, with cuts going to the wealthy and business owners, to encourage more investment. In some senses, the backdrop looks more conducive for American stocks now than at any other time in this economic cycle – the Republican tax cuts, alongside the bipartisan spending agreement, represent a substantial dollop of fiscal stimulus to an economy that is already doing pretty nicely. Both, particularly the former, will materially lift corporate earnings for the next two years.
However, the announcement of the tariffs imposed on some imports could shrink some of the savings from the cuts and inject some uncertainty into the stock market, alongside raising concerns about inflation. Analysts generally agree that tariffs are negative for the economy and will impact business confidence.
Yet fundamentals for the US economy remain strong, despite slightly slower growth in the first three months of 2018, at 2.2pc, compared to the 2.3pc that was estimated. Consumers continue to spend, and unemployment remains low.
The US stock market has not only benefited from improving global growth and corporate profits, but also from a rising oil price, and a slide in the value of the dollar. A weak dollar benefits multinational companies that receive their earnings overseas, boosting profits when they are converted back into dollars. The reverse holds true, when the dollar strengthens.
Of course, no-one can predict with any certainty which way the US stock market will move next, but the economic fundamentals appear positive for investors who are seeking to add an investment in the US to a diversified investment portfolio.
Article Source: http://tinyurl.com/kbwqb42