Ongoing trade skirmishes have weighed on the stock market in recent sessions—particularly technology stocks—as investors worry about the possibility of a global trade war.
“Trade wars are bad for the economy because they reduce global growth, increase inflation, and harm confidence,” says Mark Riepe, senior vice president of the Schwab Center for Financial Research (SCFR). “They’re also bad for the stock market, although the magnitude of the impact to specific sectors depends on the nature of the measures and counter measures.”
So far, the United States and its trading partners are somewhere in between, Mark says. While the U.S. has imposed tariffs on goods from various countries and those countries have responded, a full-blown trade war—typically including substantial tariffs, quota barriers on a broad set of goods and services, or onerous restrictions on companies from other countries—has not yet materialized, and likely won’t, he says.
“The most likely outcome is that the parties, individually or collectively, back down or get together and agree to new arrangements that either keep in place the relatively small actions that have been implemented so far, or retract them,” Mark says.
Stock market jitters
However, the prospect of a trade war has stock investors nervous. On Monday, the S&P 500® Index fell 1.4% after the Trump administration threatened restrictions on Chinese investment in U.S. technology companies, along with tariffs. The Nasdaq Composite Index dropped 2.1%, dragged down by its heavier weighting to technology stocks, which stand to lose relatively more from a trade war; 58% of the information technology sector’s revenues come from overseas.
“As we highlighted in our 2018 outlook, the risk of a trade war remains one of the most significant risks for U.S. and global stock markets,” says Liz Ann Sonders, Schwab’s chief investment strategist. “Since the trade skirmish erupted on March 1, U.S. stocks have been outperforming developed international and emerging market stocks, but bouts of volatility are likely to persist.”
In international markets, concerns over trade seem to be affecting global industrial stocks and sentiment despite still-solid domestic growth, says Schwab Chief Global Investment Strategist Jeffrey Kleintop. For example, the preliminary June purchasing manager indexes from Europe and Japan have reflected a lingering slowdown in export-oriented manufacturing, while the services indexes, which are more domestically oriented, have improved.
Another factor adding to volatility may be the start of the buyback blackout period for many companies, Jeffrey says. In general, companies halt their buybacks beginning five weeks before they report earnings until 48 hours after they report.
“With the peak in the second-quarter earnings reporting season about five weeks away, we may be losing the buying support from corporations,” Jeffrey says. “A potential offset to the blackout of corporate buying is that individual investors have been net buyers of exchange-traded funds and mutual funds that invest in U.S. and international stocks in five of the past six weeks, despite the trade worries.”
If the U.S. announces investment restrictions later this week, there are factors that may soften the blow, Jeffrey says. Chinese mergers and acquisitions of U.S. companies peaked in 2016 and has since fallen sharply, so investment restrictions won’t be a sudden shock, he says. Also, a potential deal to let Chinese telecom company ZTE buy U.S. tech equipment may ease tensions somewhat over a potential ban on such sales.
Volatility could hold bond yields down
Long-term bond yields have declined as investors moved to safe-haven investments such as Treasury bonds, driving up prices (which move inversely to yields).
“Although there are many factors that could lead to higher U.S. yields, such as rising inflation due to tariffs and an increasing supply of Treasury bonds, yields may remain depressed in the near term if volatility remains elevated,” says SCFR Chief Fixed Income Strategist Kathy Jones.
The Federal Reserve is likely to continue with a gradual pace of interest rate increases, although uncertainty about the potential impact of trade disputes on economic growth, if prolonged, could slow down the pace of hikes. At this point, the Fed is still generally expected to raise short-term rates again at its September policymaking meeting, Kathy says.
On the other hand, lower-quality fixed income investments could suffer in the near term, Kathy says. “Emerging market bonds have already underperformed year to date, and could lose more ground if volatility increases,” she says.
What to consider now
It’s nearly impossible to time the market, and it’s generally healthier for your portfolio if you resist the urge to sell based solely on recent market movements. However, here are some things you might consider doing now:
- Revisit your plan and reacquaint yourself with your investment goals and objectives. If you’re not clear about your goals, this would be a good opportunity to craft a plan.
- Revisit your risk tolerance. Periods of market volatility can be a wake-up call. Some investors feel differently about their risk tolerance after they experience volatility firsthand. If you’re not comfortable with your risk level, it may be prudent to reduce the overall risk in your portfolio.
- Rebalance your portfolio. During periods of volatility, it can make sense to rebalance your portfolio back to its long-term strategic asset allocations.
- Reach out. Need help? Consider talking to a financial planner or a Schwab Financial Consultant.
For more, check out “Market Volatility: Here’s What You Should Know.”
What You Can Do Next
- Changing economic conditions can affect how each component of your portfolio performs. It’s impossible to predict which one will be the top performer in any given year—that’s why diversification is so important. Want to talk about your portfolio? Call our investment professionals at 800-355-2162.
- Watch Schwab experts discuss other market and economic topics in the Stock Market Report.