Donald Trump's Trade War

Investors Pouring Money Into Stocks Despite Trump’s Trade War

Despite Trump’s trade war with allies, including China, the EU, and Canada, investors are continuing to put their money – and faith – into the stock market.

Investors Have Faith In The Stock Market Despite Trump’s Trade War

During a conference recently in Manhattan, investors revealed what they’re worried most about in the global economy right now. According to The Times, they’re worried about “Trump, trade wars, and protectionism.”

However, the stock market was having another great day during the same day of the conference. Despite the media hysteria surrounding Trump’s trade war, most investors are continuing to put money into American stocks.

Journalists and talk show hosts don’t really have much “skin in the game,” as Charles Bowyer put it, so whenever they say something wrong about the market, there isn’t much of an effect (4).

However, for investors, a bad decision when putting and pulling money out of stocks may lose them their money. For that reason, it might be better off to listen to investors and market forces regarding the economy rather than media sensationalism.

Trump’s Talk With Kim Jong-Un

The G7 summit last weekend was the topic of discussion due to the alleged hostility of Donald Trump. The meeting ended with verbal infighting and accusations against each other.

However, on Tuesday, Trump met with the Korean dictator, Kim Jung-un, and laid out a basic plan for how they’ll collaborate in the future.

While there were no “concrete” plans discussed, it’s good they at least spoke. An incumbent president of the United States has never spoken with a North Korean dictator face-to-face before (5).

Presidents have spoken to Kim Jung II, but not while in public office. Nevertheless, one might consider that their meeting would affect the stock market due to the opening up of a formerly isolated nation.

However, the idea that war between North Korea and the US would negatively affect the economy, is called a “tail risk” (2).

A tail risk, according to TownHall, is the effect of a highly unlikely event on the market. Bahnsen writes that “markets can’t very easily price in the downside of tail risk when the risk itself is so binary.” And by binary, Bahnsen means two categories: suffering annihilation in a nuclear war, or not (2).

For that reason, the talks with North Korea and Kim Jung-un didn’t have much of an effect on market forces.

In addition to Trump’s meeting with Kim Jung-un, the Federal Reserve raised the interest rates and announced they would do so again in the future.

And on Thursday, the European Central Bank confirmed they had ended their plan for “quantitative easing” by the end of the year (2). Despite all of this news, the markets haven’t budged much.

Trump’s Trade War With Allies

For the last six weeks, Trump has been fighting with China, the EU, and Canada.

After Donald threatened to hit European and Canadian automobile exports to the US with hard tariffs, Justin Trudeau criticized him for his steel and aluminum levies. Trudeau said that he wouldn’t “be pushed around” by the American government.

According to Trump, Trudeau’s comments were “very weak and dishonest” because his tariffs against Canada were in response to 270% tariffs against American dairy (2).

And this past Friday, following Trump and China’s back-to-back tariffs against each other on $50 billion of goods, the S & P’s 500 Index barely even took a hit (1).

Since the end of February, the S & P 500 has gained 2 percent and is up 30% since he won the election back in November 2016 (1).

Even though politicians are fighting, the stock market continues to do great, showing that, perhaps, investors aren’t as concerned as we think they are.

Investors Think The Economy Will Continue On Its Path

Because of the American economy is doing so well right now, investors supposedly think the damage brought on by Trump and his administration will be “manageable.”

According to the Times, the Federal Reserve Bank of Atlanta precited that the US economy could grow by 4.8% in the second quarter, making it the second-highest growth rate in the last ten years (1).

And, as it was previously reported, unemployment right now is at its lowest since the early 2000’s, consumer confidence and retail sales are high, and the inflation rate isn’t growing that much.

Moreover, if Trump’s tax-cuts do what they’re supposed to, businesses and consumers might spend more.

And the fact most important to investors is that companies’ total profits are supposed to grow at their fastest rate since the 2008 economic recession.

Analysts on Wall Street estimate that the companies under the S & P 500 will grow by around 26 percent this year, after a 17 percent increase in 2017 (1).

The profits of companies may be one of the primary reasons why investors keep putting their money and faith in the economy.

If all of the businesses are making money, then how Trump is squabbling with other leaders probably doesn’t matter much.

American Investors Pulling Funds From Foreign Markets To Put Into Domestic Stocks

Because of the lackluster performance of the European economy right now, Investors are pulling their money out of other nations and putting it into the United States.

In the last month-and-a-half, investors have funded $29 billion in stocks in the US, while retracting $13 billion from EU countries (1).

The European economy isn’t doing that great, even though industry specialists expected it to do well at the beginning of the year. And the trade issues in the United States are having an effect on business spending in the EU (1).

Economists for Goldman Sach’s predicted that the $50 billion tariffs implemented against China would barely have an effect, “two-tenths of a percentage point” of the gross domestic product in the next two years (1).

The US and China May Reconcile

Moreover, others think there may be a deal on the horizon between conflicting nations.

For instance, the US government showed its willingness to work with China by collaborating with ZTE, the Chinese electronics firm.

On the other hand, it could get worse, as Trump has threatened to impose yet another $100 billion worth of tariffs on China (1). China would likely return with its own set of tariffs.

Brad W Setser, a member of the Council on Foreign Relations, said that if tariffs continued to increase, it’s not likely that it will cause a recession or a calamity (1).

With that said, and as it was noted above, some people are still worried about the stock market. They’re confident in it, but also a bit fearful at the same time.

S & P hasn’t surpassed January’s peak growth, and some analysts think trade tensions are holding it back from surpassing January’s numbers.

David Rosenberg, one of the economists at Gluskin Sheff, said technology companies and other small companies are the ones to do especially well in the last few weeks. And he thinks that it’s because they’re less susceptible to trade wars (1).

However, American businesses do well due to their consumers across the globe, so the retaliation from other countries may get worse, as the trade war is just beginning.

Trump’s Tariffs Have Hurt Construction Companies Dependent On Canadian Lumber

Tariffs cause the loss of profits for businesses, because of the increased cost of doing business. And if their profits are threatened, then, of course, the profits of the United States stock market could decline also.

The type of company vulnerable to trade conflicts are construction companies. They face a range of rising costs.

One of the results of Trump’s tariffs is that American companies have to pay more for Canadian softwood lumber after he imposed 20% tariffs last year (1).

The S & P’s index for stocks in construction companies is 10% below than its recent peak (1).

Despite an improving economy, a negative side to it is the fact that interest rates are rising because the US government is borrowing a lot of money to cover the fiscal shortfall that resulted from Trump’s tax cuts.

Either way, the economy is continuing to do well right now, and the long-term effect of trade tariffs between allied nations remains to be seen.


(1) The New York Times 

(2) The Globe and Mail

(3) TownHall David Bahnsen

(4) TownHall Charles Bowyer

(5) CNN