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Nicklaus: Tariffs interrupt stock market’s sunny streak

15 May 2019

(St. Louis Post-Dispatch)

May 15, 2019 (David Nicklaus)

The stock market was doing just fine until President Donald Trump reminded investors that there’s a trade war going on.

The S&P 500 index rose 18 percent in the first four months of this year, hitting new highs amid optimism about the U.S. economy’s resilience and relief that the Federal Reserve may be done raising interest rates.

The mood is much different since Trump tweeted May 5 that he planned to raise tariffs on almost everything the U.S. imports from China. He carried out the first part of that threat Friday by raising an existing tariff from 10% to 25%, and China retaliated Monday, with tariffs on $60 billion a year worth of U.S. exports.

Stocks have fallen 4% since that consequential tweet, with the heaviest damage hitting companies that depend on China as a market or a source of products. Soybean processor Archer Daniels Midland is down 7%, Caterpillar 10% and Apple 12% since Trump announced the tariff increase.

This reaction comes as the U.S. economy seemed to be weathering the trade war’s early rounds. Gross domestic product grew a better-than-expected 3.2% in this year’s first quarter, and the Congressional Budget Office estimated in January that so far, Trump’s tariffs are reducing GDP growth by just 0.1 percentage point.

If the effects are modest, why is the stock market so worried about tariffs?

For one thing, the market is all about expectations. All signs had been pointing to some sort of agreement with China, and any progress on that is now weeks or months away.

“I think people had written this off as a topic,” says Ken Crawford, senior portfolio manager at Argent Capital Management. “Everybody had expected Xi (Jinping, the Chinese president) and Trump to shake hands and smile, and investors don’t like surprises.”

The tariffs also could have a bigger effect on corporate profits than on the U.S. economy. If Caterpillar loses revenue, or Apple pays more for iPhone components, profit margins will shrink.

The S&P 500 companies get nearly 40% of their revenue from outside the United States, so they’re sensitive to anything that makes trade more difficult. “This feeds into worries about a slowing of global growth,” says Scott Wren, senior global equity strategist at Wells Fargo Investment Institute.

Keep in mind that stock prices had risen rapidly since Christmas, so maybe a pause was overdue. “We’re less than 5% off the high, after you had a gigantic gain,” Wren says. “You could argue that the market is hanging in there OK, given that there were positions placed assuming a positive outcome in the trade talks.”

Crawford expects markets to remain nervous about trade issues at least until Trump and Xi meet in late June, and perhaps longer. “Investors, like all humans, see a couple of dots and start drawing lines,” he said. “The line today on the U.S.-Chinese relationship has a negative slope.”

When companies report second-quarter profits this summer, Crawford expects them to face questions about the new tariffs’ effect. If profit margins appear to be under pressure, stock prices could have farther to fall.

Trump has often boasted about the rising stock market as an indicator of his successful economic policies. It will be interesting to see how big a correction is needed before he realizes the damage his tariffs are causing.