Stocks Drop Amid Trade Concerns

A note from Schwab Center For Financial Research.

A trifecta of concerns drove stocks lower last week, including an announcement by the Trump administration that it would impose roughly $50 billion in tariffs on imports from China. The news came amid concerns about procedures social media firms use to protect the data of its users and potentially stricter government regulation of the sector, as well as a more hawkish tone from the Federal Reserve regarding future interest rate increases.

“It looked much like a classic flight-to-safety situation, with utilities holding up while the more internationally focused areas such as industrials took a bigger hit,” says Brad Sorensen, managing director of market and sector analysis for the Schwab Center for Financial Research (SCFR).

He cautioned about reading too much into the market correction. “The economy still looks strong and the upcoming earnings season should be solid,” Brad says.

Bonds may rally in the short term

Bonds could rally in the short term, says Schwab’s Chief Fixed Income Strategist Kathy Jones. “Bonds often are perceived as a safe haven when the stock market declines, so yields could fall as investors look for an alternative to stocks,” she says.

However, in the long run the news may be more negative than positive, Kathy says. “Tariffs and trade conflicts tend to raise the cost of imported goods, lifting inflation, while slowing economic growth. The bond market could be caught between rising inflation and slowing growth, causing corporate bond prices to decline relative to Treasuries,” she says.

Uncertainty for international markets

International markets are focused on any intensification of trade spats that could weigh on earnings, says Schwab Global Investment Strategist Jeffrey Kleintop. The average company in the MSCI World Index derives more than half its sales from international trade, he says.

“The tariffs were limited to roughly 12% of U.S. imports from China,” Jeffrey says. “However, the 30-day comment window intentionally leaves little time for negotiation before they go into effect.”

While the new China tariffs and related trade measures renewed trade anxiety for investors, other recent major trade developments lessened the threat of a global trade war, Jeffrey says. These include:

  • the U.S. compromised on a key NAFTA sticking point, relaxing its demand for 50% U.S. content in North American automobiles;
  • UK and EU negotiators struck a deal on Brexit terms;
  • the U.S. exempted allies from the metals tariffs (including the EU, Brazil, South Korea and Australia);
  • China promised to protect foreign intellectual property, a key demand of the Trump administration;
  • the leaders of 44 African countries signed a deal to create one of the world’s largest free-trade blocs.

Considerations for long-term investors

It’s nearly impossible to time the market, and it’s generally healthier for your portfolio if you resist the urge to sell based solely on recent market movements.

Every investor is different, but periods of market volatility can also be a wake-up call to make sure your portfolio is adequately diversified or to consider adding defensive assets, such as cash or U.S. Treasury securities, for stability. If you don’t have a financial plan, now might be a good time to talk to a planner about creating one. For more information on steps investors can consider during volatile markets, check out “Market Volatility: Here’s What You Should Know.”

The takeaway for traders

The ongoing Facebook saga continues to create concerns, especially among many high-flying technology stocks, says Randy Frederick, vice president of trading and derivatives for Schwab.

“Add to that the proposed implementation of as much as $50 billion in new tariffs against China, downgraded first-quarter gross domestic product forecasts, an interest rate hike and revised outlook from new Fed Chair Jerome Powell, and you have a recipe for more market volatility,” Randy says. “With the potential for retaliation from China against U.S. agricultural exports, volatility—and therefore risk—is likely to continue for a while.”

While the possibility of a government shutdown has been averted, tech shares are facing pressure and a potential trade war is still festering, so traders should exercise patience before they consider adding equity exposure,” Randy says.

Continue reading