The recent increase in trade tensions prior to the arrival of the Chinese Trade delegation to Washington DC led to a four percent sell-off in equity markets from the April 30th closing high. However, the S&P 500 is still up 13.72% year-to-date and 21.26% from its December 24th closing low of 2,351.10. Equity markets became frothy and a little stretched during the runup to all time new highs in late April. The plan to initiate substantial new tariffs on Chinese goods created a great deal of uncertainty about the economic outlook and gave investors an easy excuse to take some profits. Since the tariffs are not assured of being implemented and it’s not clear they would lead to significant economic weakness, the selling is likely an overreaction. Nevertheless, a long-term increase in tariffs on a broad array of goods would be serious and merits investors’ attention.
NPP does not think that the new tariffs are likely to lead to escalating tensions and protectionism. We were skeptical that a grand deal on trade could ever be reached and still feel this is unlikely. The most likely type of bargain is still a trade “deal” where certain agreed upon issues are solved and thornier concerns are worked on over the coming years and/or ignored altogether. NPP has felt for a while that some of these trade issues are structural and independent of President Trump. In other words, a different President or Congress might handle the optics of the negotiations differently, but the end results would be very close to what is happening now.
The market needed a pullback and/or pause to refresh valuations. Now that the pullback is in process, we expect the sell-off will represent another buying opportunity and will likely be a mild one in the five to ten percent range. There are stocks that are at risk. Companies that export significantly to China or import goods from China will suffer in the short-term unless a deal is made. Nonetheless, NPP thinks the market trend is still up. There aren’t any obvious signs of a U.S. recession and first quarter earnings are coming in well ahead of expectations. Additionally, some of the weaker overseas economies are improving slightly after several weak quarters. The market may not rebound immediately, but we think it likely that the recent losses will reverse once the recent trade skirmish wanes.