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Markets shrug off escalating U.S.-China trade fight as tariffs mount

Markets shrug off escalating U.S.-China trade fight as tariffs mount
Traders on the floor of the New York Stock Exchange on Aug. 1, 2018. (Bryan R. Smith/AFP/Getty Images)

Tariffs, shmariffs — or so investors seem to be saying as the stock market keeps trading near record highs despite the escalating trade battle between the United States and China.

Even though China slapped tariffs on an additional $60 billion of U.S. products after President Trump placed tariffs on an additional $200 billion of Chinese goods, the stock market rallied again Tuesday. The Dow Jones industrial average climbed 0.7% to 26,246.96 and the bellwether Standard & Poor’s 500 index gained 0.5% to 2,904.31.

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Moreover, the Dow and the S&P 500 have risen 6% and 9% so far this year, respectively, even though the trade battle has gained intensity in recent weeks with one set of tariffs being levied after another. The tech-heavy Nasdaq composite index is up 15%.

“The largest reason that the market has been able to handle it is because the [U.S.] economy is in good shape right now,” said Art Hogan, chief market strategist at the investment firm B. Riley FBR.

Investors also were relieved that the latest U.S. tariffs, set to take effect this Monday, were 10% instead of the 25% initially proposed by the Trump administration. They’ll rise to 25% next year if the trade dispute isn’t resolved, the White House said.

Even so, “there is still enough going on that could go wrong” in the U.S. trade efforts with China, Canada and Europe, Hogan cautioned. And other analysts said that while many on Wall Street see the tariffs against China as mostly a tactic to get the Chinese to the negotiating table, investors could stop bidding stock prices higher if that tactic fails and the dispute drags on.

There is widespread concern that the tariffs against China will effectively punish American consumers by forcing U.S. importers and retailers to raise prices and that, in turn, the tariffs on U.S. exports to China will make those American goods less competitive.

There’s also the overall fear that the tariffs will pinch rising corporate profits and threaten the U.S. economy’s current robust growth.

But the stock market — which reflects expectations about where profits and the economy are headed — indicates that investors at least for now are not terribly worried the trade fight will cause big financial trouble.

Conversely, the Chinese stock markets have slumped, with the benchmark Shanghai composite index down 18% so far this year. The U.S. dollar also has gained 5% against the Chinese yuan in 2018.

“We believe the U.S. is in a much stronger negotiating position than China,” Jeff Carbone, managing partner at the investment firm Cornerstone Wealth, said in a note to clients. “Our markets flirt with all-time highs and the U.S. dollar remains strong while the Chinese stock markets flirt with bear-market territory.”

Trump, acting on his long-held belief that the U.S. trade deficit — especially with China — harms U.S. interests, announced the new 10% tariffs Monday on roughly 5,000 products. That includes an array of consumer goods, including luggage and seafood.

The White House removed about 300 items from the Chinese imports scheduled to be hit with the tariffs, including smart watches, bicycle helmets and child car seats.

The tariffs, which came on top of $50 billion of tariffs levied on Chinese imports earlier this year, also are in response to White House allegations that China unfairly acquires U.S. technology and intellectual property, in part by “forcing United States companies to transfer technology to Chinese counterparts.”

China responded with tariffs of 5% to 10% on the additional 5,207 U.S.-made goods valued at $60 billion a year, including coffee, honey and industrial chemicals. China did so to “defend its legitimate rights and interests” and to “to curb the escalation of trade frictions,” China’s Customs Tariff Commission said.

While an array of companies and business groups have decried the tariffs, and warned of higher prices for consumers, so far there has not been a rash of publicly held companies marking down their guidance for sales and earnings in the second half of this year — a step that typically triggers a drop in stock prices.

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The tariffs’ effect “so far is not going to be substantial, that’s what stocks are saying,” said Jason Ware, chief investment officer of Albion Financial Group, which manages $1.1 billion in assets.

“Investors are saying that the economy is strong enough to weather small price increases, if we get those through the tariffs,” Ware said.

“The price of a shirt or leather handbag or some food might go up,” he said. “But on balance, we have a strong enough economy, a strong enough job market and slightly rising incomes that those increases can probably be absorbed without too much damage.”

To be sure, there has been a strong effect already. For instance, prices of U.S. soybeans on the Chicago Board of Trade have tumbled 15% so far this year after China — a huge importer of soybeans — levied an extra 25% tariff on U.S. soybeans entering its market on top of the 3% duty assessed on all imported soybeans.

And not everyone on Wall Street is persuaded that the stout U.S. economy will continue to outweigh the tariffs and keep lifting stock prices.

“Caution is warranted, and I’ve been raising cash in order to take advantage of any pullbacks,” Chris Zaccarelli, chief investment officer of Independent Advisor Alliance, said in a note Tuesday. The market, he added, “is more vulnerable to a pullback right now than at any times this year since the irrational exuberance we experienced in January.”

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