Wall Street appears unfazed by the escalating trade conflict between the United States and China.
The Dow surged 175 points and the Nasdaq rose by 1% on Tuesday, even as Washington and Beijing moved forward with additional punitive tariffs. Investors remain confident that the US economy will continue to outperform the global landscape.
However, underlying concerns are emerging regarding the global economy’s capacity to endure the trade war and potential issues in emerging markets.
Approximately one in four professional investors is preparing for a slowdown in global growth over the coming year, as indicated by a survey from Bank of America Merrill Lynch released on Tuesday. This marks the bleakest outlook in the monthly survey since December 2011, up from just 7% in August when sentiment was more optimistic.
Nearly half of the investors surveyed believe that the US economy will decelerate, aligning more closely with global trends.
Only one in three shared this sentiment in August.
“Investors are maintaining higher cash positions, indicating a bearish outlook on growth,” noted Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, in communications to clients.
Unsurprisingly, the trade war has remained the primary concern for the fourth consecutive month. The second major concern pertains to a slowdown in the Chinese economy.
The survey was conducted from September 7 to September 13, prior to President Donald Trump imposing a 10% tariff on $200 billion worth of Chinese goods and Beijing’s announcement of retaliatory tariffs on $60 billion worth of US imports, with rates between 5% and 10%.
“It does appear we are nearing a spiral phase,” expressed Peter Boockvar, chief investment officer at Bleakley Advisory Group, in a message to clients on Tuesday.
Anne Van Praagh, a managing director at Moody’s, commented that increased tariffs will “harm the economy by distorting prices,” leading to inefficiencies and negatively influencing investment choices.
‘Black Swan’ metric on the rise
Wall Street seemed to take the latest updates in stride: the Dow climbed within 400 points of a historic high, a first since January.
The VIX (VIX) volatility index, which gauges market turbulence, decreased by 7%, settling at a calm level of 13. It’s worth remembering that this “fear gauge” spiked to 50 back in February.
Conversely, a lesser-known indicator of investor anxiety is showing more alarming trends. The CBOE SKEW Index rises when options trading reflects concerns about a “black swan” event — an unforeseen occurrence that could have a significant impact. This index is currently trading near its highest level since records began in 1990.
US markets have been supported by a robust domestic economy capable of withstanding trade pressures. The US unemployment rate stands at a mere 3.9%. Moreover, the nation’s gross domestic product surged at an annualized rate of 4.2% in the second quarter.
Despite the ongoing trade standoff, growth is projected to accelerate to 4.4% in the third quarter, according to a notably volatile forecasting model from the Atlanta Federal Reserve.
‘It’s going to be chaotic’
The forecasted impact of proposed tariffs on GDP growth in the US is expected to be “very modest,” according to Goldman Sachs chief economist Jan Hatzius in communications to clients on Tuesday.
Hatzius acknowledged the possibility of a resolution between Washington and Beijing but noted that “further escalation seems likely,” creating a “highly uncertain” environment.
Nevertheless, several notable business leaders are beginning to raise alarms.
The Business Roundtable, a significant lobby group led by JPMorgan Chase (JPM) chief Jamie Dimon, released a statement asserting that “unilaterally imposing tariffs is an ineffective approach to achieving meaningful reforms” and warns of “further detrimental impacts on US businesses and workers.”
FedEx (FDX) CEO Fred Smith mentioned to analysts on Monday that the US-China trade conflict is “concerning for everyone” and may already be contributing to a slowdown in China’s economy.
Alibaba (BABA) founder Jack Ma cautioned that the US-China trade war could persist for up to 20 years. “It’s going to be long and complicated,” Ma stated on Tuesday.
UJ (New York) First published September 18, 2018: 1:56 PM ET
