Escalating Tariffs Test Investors’ Faith in U.S. Growth
The sharp stock-market selloff of recent days is confronting investors with a quandary long avoided during the 10-year-old bull market: Riskier assets suddenly look very risky.
Gains in U.S. stocks have made them historically expensive relative to global equities. Economic growth remains solid, but some analysts and investors said the escalation of trade tensions underscores the fragility of this year’s rally, which was spurred by hopes the U.S. could avoid a slowdown hitting other parts of the world.
Some argue the reaction to the trade spat is potentially overblown, yet the repeated flare-ups continue to make investors nervous. Beijing said Monday it would raise tariffs on roughly $60 billion worth of U.S. imports June 1 after President Trump increased duties on $200 billion of Chinese imports on Friday.
Many now worry that those frictions will upend the recent calm, potentially marking a return to the sustained declines that rattled markets in November and December.
In response, some are trimming investments in stocks and favoring cash or other assets considered safer. Others are looking for cheap stocks that can hold up if economic growth slows in the coming months.
The S&P 500 suffered its worst week of the year last week and slid 2.4% Monday for its worst day since Jan. 3. Selling also hit shares of smaller companies that earn more of their revenue domestically — a sign of mounting fears that slowing growth overseas could spread to the U.S. Although some analysts say the direct effects of higher tariffs could be contained, many caution that the possibility of further increases will likely continue rocking markets.
Megan Horneman, director of portfolio strategy at Verdence Capital Advisors, said the firm has lowered stock positions in recent weeks and increased cash holdings.
She said the latest tariffs are more likely to dent consumer and business confidence. “That’s where you could see a bigger impact to the economy,” she said.
The S&P 500’s Monday fall marked its fifth decline in six sessions, bringing its drop over that span to 4.5% and paring its 2019 climb to 12%. Last week marked the index’s largest one-week decline since Dec. 21. Meanwhile, the Russell 2000 of small-cap stocks has declined 5.7% over the past six sessions and re-entered correction territory Monday, down more than 10% from its August record.
In one sign of investor caution, $14 billion flowed out of U.S. mutual and exchange-traded funds during the week ended Wednesday, the largest weekly outflow since late January, according to a Bank of America Merrill Lynch analysis of EPFR Global data.
Still, U.S. stocks have fallen less than global equities, pushing the ratio of the S&P 500 to the MSCI AC World ex USA Index to a fresh record of 10.4 last week, a Dow Jones Market Data analysis of data going back to 1993 shows. It stayed elevated at 10.3 Monday, indicating investors are willing to pay more for U.S. stocks relative to international equities.
“There’s still a sense that the U.S. economy is the driver of the global economy, that its resiliency is surprising to many,” said Joseph Amato, chief investment officer of equities at asset manager Neuberger Berman. The tariffs “will cost some growth, but I still think there’s enough underlying strength in the economy to withstand it,” Mr. Amato said.
Even factoring in earnings of companies in the respective indexes and their historical valuations, data show U.S. stocks are more expensive, investors say. The trend has also held for materials sensitive to global economic activity because they are critical for transportation and manufacturing. The ratio of the S&P 500 to the S&P GSCI commodities index rose to 6.7 earlier this month, near its 15-year peak hit in June 2017. It fell to 6.5 Monday.
Some analysts view such measures as a sign that cheaper assets overseas will offer greater returns over longer time periods. But a downbeat trade outlook has prompted caution among investors because growth in those areas has lagged behind.
“We’re going to have to be nimble with our portfolios,” said Meghan Shue, senior investment strategist at Wilmington Trust, which reduced investments in U.S. large-cap stocks and emerging markets and boosted cash holdings in response to Friday’s tariff increase. “As the tariffs continue to escalate, I think they will impact the U.S. economy more than people realize.”
One factor boosting confidence that U.S. stocks can avoid 2018’s sharp slide: the Federal Reserve’s halt to interest-rate increases. Central-bank officials have said they feel comfortable leaving rates where they are following a stretch of muted inflation.
Figures showing the U.S. economy grew faster than expected in the first quarter and that the unemployment rate fell to a nearly five-decade low in April have also renewed faith that the nearly 10-year-old expansion can continue, investors say.
But some analysts are less confident following data showing a slowdown in first-quarter business and consumer spending growth. In addition to tariffs related to China, some investors are bracing for continued protectionism involving other countries after the Trump administration in April moved toward imposing tariffs on about $11 billion in imports from the European Union.
Stocks already notched one of the strongest starts to a year in more than three decades, leaving investors questioning how long the U.S. can continue leaving the rest of the world behind.
“It does make us cautious,” said Jennifer Ellison, a principal with money-management firm BOS. “The U.S. market is frothy and foreign markets are cheap relative to the U.S. and their own historic pricing.” Ms. Ellison said the firm has slightly increased investments in international stocks in recent years and boosted positions in so-called value stocks that appear cheaper in the U.S.
Source: Dow Jones