The International Trade War Is Really A
TRADE DISPUTE WAR
-By Mark Martiak
U.S. stocks surged to begin the last week of May, powered higher by shares of industrials companies, as concerns about a trade war between the U.S. and China eased. On Monday, May 21, 2018, The Dow Jones Industrial Average jumped 363 points, or 1.5%, to 25,077, topping 25,000 for the first time since March 16th. The S&P 500 and Nasdaq Composite both advanced 0.9% (1)
Money managers said discussions between the U.S. and China over the weekend of May 18th-20th have helped avoid a trade war. In an interview on May 21, Treasury Secretary Steven Mnuchin said the U.S. will suspend the $150 billion that it had previously threatened to levy on Chinese imports. Secretary Mnuchin indicated the trade war was a trade dispute – sounding as if the Trump Administration would tone down the rhetoric.
Shares of industrials companies were the biggest winners in the S&P 500, adding 1.9%. These companies tend to be exposed to foreign sales, making them a beneficiary of cooling rhetoric on trade. Boeing, which has been sensitive to investor sentiment on trade, was the biggest gainer in the Dow, rising 3.7%.
The U.S. is set to complete the procedural steps to apply tariffs on $50 billion of Chinese imports sometime before June 12th and has threatened to apply levies to a further $100 billion. While China had pledged to retaliate, it has now agreed to purchase a larger amount of American goods to help close the U.S. trade deficit.
While the global economy remains robust and first-quarter earnings have been strong, stock markets have mostly traded sideways this year because many investors have started to fear that the pace of the expansion has already peaked.
The Russell 2000 is trading at new all-time highs and this bodes well for mostly U.S. small capitalization stocks given the stronger U.S. dollar. Oil prices are higher after lagging for most of this historic bull market cycle. With this in mind, stocks overseas may be dragged down by the stronger dollar, higher Treasury yields and weakening economic indicators in Europe.
The dollar reigns supreme in global finance. It accounts for a dominant share of international financial transactions and is the ultimate haven currency. But the US currency’s supremacy cannot be taken for granted. President Donald Trump may be sowing the seeds of its demise. Professor Eswar Prasad at Cornell University and a senior fellow at Brookings suggested in a recent Financial Times Opinion article that the falling cost of transacting in other currencies and the rise of emerging market currencies such as China’s renminbi are already reducing the dollar’s role in denominating and settling cross-border transactions. Professor Prasad goes on to say that China and South Korea are conducting trade using their own currencies rather than relying on the dollar as a “vehicle currency”. The logic he suggests for denominating in dollars virtually all oil and commodity contracts are waning (2).
If the dollar weakens and even wanes as the dominant medium of exchange, it will remain a trust haven. Foreign investors and central banks have shown no signs of forsaking their dollar assets.
U.S. institutions have staying power, however taking them for granted could prove detrimental. When the American political system has come under stress in the past, our free press, backed by an independent judicial branch, has functioned as a correcting mechanism. Since President Trump has come to power, all these institutions are under attack from Trump abetted by a GOP Congress. Mid-term elections may alter the rhetoric however much of it isn’t waning any time soon. As Professor Prasad noted, the dollar’s supremacy depends on the durability and strength of its institutions. And, it is precisely these institutions that the Trump administration is eroding (2).
On the first Monday in May, I was asked by MarketWatch about President Trump’s position on the Iran nuclear deal and what it meant for the market rally that day and my response was that we were waiting on more clarity about the Iran deal. If Trump pulls out, which other leaders have urged him not to do, then the oil supply will be cut, which will have the same impact as rising demand in terms of driving up prices. But even beyond that, I highlighted that we were entering the summer driving season which would drive demand and the energy sector has been down for so long that it looked poised for a rebound. And it has. Trump indicated that the Iran nuclear deal was off with Iran the very next day on May 8th.
Beyond that, I was quoted as saying that there were no obvious market catalysts on the horizon, which leaves more room for geopolitical risk to impact trading (3).
In the near term, the stock market’s momentum along with oil’s rise will hinge on trade agreements and the rise and fall of the dollar’s strength against other currencies. I expect we’ll see a lot more stock market volatility going forward.
For investors, the best approach remains steady as she goes. On-again, off-again Sino-U.S. trade “wars” are really trade disputes and have begun to increasingly look like a semi-permanent part of the investment environment. My view is to avoid the market noise here and overseas and stay disciplined and patient with your investment holdings while remaining cautiously optimistic about the stock market performance this summer. In other words, watch what the Trump Administration does and not what they say.
Mark Martiak is a New York based Investment Advisor Representative for Premier Wealth Advisors LLC. Mark is a regular Contributor for VEGAS LEGAL MAGAZINE who has appeared on CNBC’s CLOSING BELL, YAHOO! FINANCE MIDDAY MARKET MOVERS, FOX BUSINESS NETWORK and has been quoted in THE WALL STREET JOURNAL. Securities offered through: First Allied Securities, Inc. A Registered Broker/Dealer. Member: FINRA /SIPC. Advisory Services offered through: Premier Wealth Advisors, LLC. (PWA) & First Allied Advisory Services, Inc. (FAAS). Both Registered Investment Advisers. PWA is not affiliated with First Allied Securities, Inc or FAAS.
1. The Wall Street Journal on May 21, 2018: U.S. Stocks Jump as Fears of Trade War Ebb
2. Financial Times on May 20th, 2018: America beware: dollar supremacy is not forever.
3. MarketWatch on May 7th, 2018: Stocks end higher, but cuts gain after Trump says Iran decision imminent.
Such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Data is taken from sources generally believed to be reliable, but no guarantee is given to its accuracy. Indexes are unmanaged, and investors are not able to invest directly into any index. Past performance is no guarantee of future results.