Economists say there are no winners in a trade war, and American farmers, appliance companies and automakers are proof that tariffs can inflict financial harm.
But if you’re using the stock market as a measure of who’s winning the trade dispute, the U.S. has a clear lead over China and its other trading partners.
While stock prices are just one way of gauging who’s feeling more of the ill effects of tariffs, there’s no disputing that shares of U.S. companies are performing better than China-based stocks and other foreign markets, says Alec Young, the New York-based managing director of global markets research for FTSE Russell.
“There’s a lot of ways to judge this, and I expect a lot of twists and turns, but if we just look through the lens of the market, we’ve seen a much stronger U.S. stock performance,” Young says.
The Standard & Poor’s 500, a stock index filled with America’s biggest companies that get more than 43 percent of their revenues from overseas sales, is up 6.1 percent this year. China’s Shanghai composite is down nearly 13 percent over the same period. The major stock index in Japan is down a little less than 1 percent and European shares are up just 0.3 percent.
The better performance of the closely watched U.S. stock index is good news for individual investors, as there is $3.4 trillion invested in index funds that track the S&P 500 in all sorts of accounts, ranging from 401(k)s and IRAs to mutual funds and exchange traded funds, according to S&P Dow Jones Indices. A 401(k) investor with a $100,000 investment in the large-company stock index at the start of 2018 was sitting on a gain of $6,100 through July 25, compared with a loss of roughly $13,000 for a Chinese investor who began the year with a similar-sized investment in the Shanghai composite.
So why are shares of U.S. companies holding up better, even though Kate Warne, investment strategist at St. Louis-based brokerage Edward Jones, says all markets have been “hampered” by tariffs and worries about the possibility of additional levies and more trade disruptions?
Reasons include:
U.S. is negotiating from position of strength
The tariff dispute comes at a time when the U.S. economy is performing extremely well, Warne says. And that enables President Donald Trump to negotiate a better deal from a position of strength.
Corporate profits are on track to grow by more than 20 percent for the second consecutive quarter, its best back-to-back performance since 2010. The U.S. jobless rate is at an 18-year low. And the economy is picking up, with economists forecasting second-quarter GDP growth of 4 percent, which would mark the fastest pace since 2014. China, as well as Europe and Japan, is experiencing slowing growth.
The U.S. economy is also benefiting from lower corporate tax bills and government spending.
“Stock markets are barometers of domestic conditions, and they show the short-term outlook for China isn’t as positive as for the U.S.,” Warne explains.
That’s not to say individual U.S. companies won’t experience a hit to profits from the tariffs.
General Motors, the nation’s biggest automaker, for example, said Wednesday that higher commodity costs, mainly from steel, which has risen in price since the president announced a 25 percent tariff in March, took a $300 million bite out of its quarterly earnings. GM shares tumbled on that news, as the company cut its forecast for full-year profits due to rising costs.
Similarly, appliance maker Whirlpool said Tuesday that demand for its washing machines was “very soft” from April through June after it raised prices to cover higher costs related to “raw material inflation.”
U.S. farmers have also taken a hit after China, which is the largest importer of U.S. soybeans, retaliated with tariffs on that crop.
Investors bet on Trump deal-making
Despite fears that the trade dispute could spiral out of control, which would slow global growth and dampen investor and business confidence, Wall Street pros still believe the president’s use of tariffs as a negotiating tool will likely be a winner.
If Trump wins concessions from China or the European Union, it could prove bullish for stocks as trade terms improve for U.S. companies.
“Right or wrong, many investors still feel the U.S. has the upper hand in this battle and will win in the end,” says Randy Frederick, vice president of trading and derivatives at the Schwab Center for Financial Research.
China has more to lose
Chinese exports to the U.S., measured in dollars, outnumber incoming American goods to China by a 3 to 1 margin. Remember, nearly 70 percent of the U.S. economy is driven by domestic spending by consumers. China, which is running a $280 billion trade surplus with the U.S, according to data from financial firm Stifel, can’t risk losing too much of its American business, Wall Street pros say.
“The U.S. is a customer of size with buying power that is hard to replace,” says John Stoltzfus, chief investment strategist at Oppenheimer Asset Management.
And although tariffs could cause prices for consumer products ranging from cars to washing machines to rise, “the U.S. does not need China as much as China needs the U.S.,” says Barry Bannister, head of institutional equity strategy at Stifel.
So far, there is “little evidence trade is having a negative impact on economic data,” says Young of FTSE Russell, adding that the massive U.S. economy is more insulated from trade strife because growth comes from many sectors of the economy, including industries such as health care, which are not as hard hit by tariffs as are industrial companies.