Is the U.S. in a trade war or a trade skirmish?
On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Consulting Director Sophie Antal Gilbert discussed the impact of trade war fears on global equity markets, the U.S. economy and U.S. small-cap stocks.
Rising trade tensions test markets
Broadly speaking, markets were down the week of June 18 when compared to the week of June 11, Ristuben said—with the S&P 500® Index off a little less than 1%, the Euro STOXX 600® Index down roughly 1% and the MSCI Emerging Markets Index off about 3% (as of mid-day on June 22). The primary reason? An escalation in trade war worries, Ristuben said.
”Markets view trade wars as negative events, because they typically see them as potentially lowering the gross domestic product (GDP) growth of the globe—which in turn could lead to lower corporate earnings, which of course could then lead to lower stock prices,” he explained.
However, context is important when it comes to understanding the trade disputes that have ensnarled several of the world’s major economies, Ristuben said. For instance, he noted that China recently said it may potentially match the additional $200 billion in tariffs threatened by the U.S. by slapping an equivalent amount on U.S. imports. “Such an amount would comprise less than 1% of U.S. GDP,” Ristuben noted—“which is why it’s important to understand the scope of what we’re talking about.” In his opinion, the relatively small size of goods being targeted by tariffs makes the current trade disputes between the U.S. and other countries skirmishes, rather than wars—at least for now.
Is fiscal stimulus keeping the U.S. economy booming?
The U.S. economy has proven relatively resilient to trade skirmishes so far, Ristuben said, with the nation appearing on track for continued economic growth through the rest of the year. As long as the current trade disputes remain in skirmish territory, he and the team of Russell Investments strategists believe there will be limited impact to the country’s growth.
“What’s likely to continue having a much bigger effect is the recently-passed fiscal stimulus package in the U.S.—particularly the increased spending bill authorized by Congress in February,” Ristuben stated. He added that, in general, economic data has been trending stronger in the U.S. than other countries so far this year—an indication that the nation’s fiscal stimulus package is likely having more of an impact than any trade war concerns.
What’s behind the performance of U.S. small-cap stocks?
U.S. small-cap stocks, as measured by the Russell 2000® Index, have generally been posting stellar returns so far this year, Ristuben noted. In his opinion, this strong performance is being driven chiefly by two factors: a relative detachment from trade war fears, and the performance of the U.S. dollar.
“Small companies typically don’t source much of their revenue base from exports,” Ristuben said, “and that’s really key here, as these companies aren’t typically going to be hit by worries over trade.” In addition, the recent strengthening of the U.S. dollar—a headwind for larger U.S. companies with overseas sales—isn’t a challenge for most small companies for the same reason, he noted.
“Ultimately, it’s not a surprise to me that U.S. small-cap stocks are largely winning in 2018—and they very well may continue to win for a while,” Ristuben concluded.