Stocks Show It Hasn't Paid to Be Long on Donald Trump

(Bloomberg Opinion) -- U.S. stocks were on the defensive Thursday as traders awaited the results of a crucial meeting between U.S. and Chinese trade negotiators. With little to divine from the day’s market activity, it’s a good time to dissect the longer-term price action in equities to see what that might say about the Trump administration’s willingness to escalate the trade wars.

In the lead-up to the 2016 U.S. Presidential election, every major Wall Street firm complied lists of stocks that would likely do well if either Donald Trump or Hillary Clinton won. As we all know, Trump won, and Morgan Stanley’s Long Trump Basket of 54 stocks (those seen as benefiting the most from his presidency) outperformed the S&P 500 Index from the election through 2017. Then came Trump’s trade wars, and rather than helping his constituents, they have had a detrimental effect – at least in the stock market. The Morgan Stanley index has fallen 6.94% since the Trump administration implemented tariffs on imported steel and aluminum in March 2018, compared with a gain of 4.81% in the S&P 500. That gap in performance is the widest since Trump was elected in November 2016. To be sure, Chinese stocks have done even worse, with the MSCI China Index dropping 14.6%. And even though the broad U.S. stock market is up, albeit not by much, that’s largely due to tech-related shares instead of old-economy type stocks such as those in the industrial sector that Trump vowed help while on the campaign trail. If Trump does decide to impose additional tariffs at midnight, it’s likely to cause more pain for stocks. UBS Group estimates that with higher tariffs and a breakdown in talks, profits for U.S. companies could contract by 5%, wiping out the 4.6% increase analysts forecast, according to Bloomberg News’s Sarah Ponczek.

Stocks Show It Hasn't Paid to Be Long on Donald Trump

With a 25% tariff rate instead of the current 10%, gross margins for S&P 500 companies could narrow by 23 basis points, according to Bloomberg Intelligence. If the U.S. administration slaps the tax on all goods from China, the hit to margins could be an even larger 50 basis points. “China-trade risks have largely been priced out of U.S. equities this year, suggesting any tariff-policy shift is likely to trouble stocks’ bullish trend,” Bloomberg Intelligence’s Gina Martin Adams and Michael Casper wrote in a research note. 

BOND YIELDS INVERT AGAIN
The U.S. economy has so far weathered tariffs imposed by the U.S. on Chinese and some other foreign goods, but that may change if the Trump administration decides to follow through on its threat and boost the current rate from 10% to 25%. Trump’s prior threat to increase tariffs as of Jan. 1 caused U.S. companies to pull forward purchases of goods from China to the end of 2018 so they could get ahead of that deadline, according to Bloomberg News. Such “supply-chain padding” helped lead to both a buildup in inventory stockpiles and a narrowing of the trade gap, notes Carl Riccadonna, chief U.S. economist for Bloomberg Economics. The effect was to make “growth appear stronger than meets the eye,” he says, noting that data on final sales, which excludes trade and inventories, had the economy growing at a rate of just 1.4 percent. So, it’s no wonder that the U.S. Treasury market rallied again on Thursday, pushing yields toward their lows for the year in a sign that bond traders are forecasting an economic slowdown. More ominously, a closely watched section of the U.S. yield curve inverted for the second time this year, as 10-year yields briefly fell below three-month bill rates. As a reminder, every recession since the 1950s has been preceded by an inverted yield curve.

Stocks Show It Hasn't Paid to Be Long on Donald Trump

THE YUAN IS ON THE MOVE
Trump insisted on Thursday that a trade deal with China was still possible to reach this week. Perhaps, but there’s a major sign that China’s authorities aren’t so sure. That can been in the performance of China’s currency, whose moves are closely controlled by the government, which allows the yuan to move no more than 2 percent on either side of its daily fixing rate against the dollar. So it’s notable that the yuan fell the most since October on Thursday, dropping to its weakest since early January at 6.8274 per dollar. It’s not hard to think that China is allowing its currency to depreciate in an effort to soften the blow against further tariffs. “The Chinese authorities will be happy to see the yuan weaker, but will continue to manage (it) against a basket” of currencies, Blackfriars Asset Management money manager Tony Hann told Bloomberg News. “They will want to avoid accusations of ‘currency manipulation.’” What’s concerning is that the currency is closing in on the critical 7 per dollar rate that it approached in late October. That rate, if breached, was seen as likely sparking a capital flight from China, throwing growing global markets in disarray. Conversely, its strength this year was seen as bolstering confidence in riskier assets globally. The yuan has been an “anchor of stability for all markets,” Kit Juckes, a global strategist at Societe Generale SA, wrote in note to clients on Thursday.

Stocks Show It Hasn't Paid to Be Long on Donald Trump

TRADE PAIN ESCALATES FOR FARMERS 
The trade war has been particular tough on farmers. The Bloomberg Agriculture Subindex has fallen to its lowest since the early 1970s, dropping 10.4 percent this year alone, compared with a gain of 2.41 percent for the broader Bloomberg Commodity Index. The just-released monthly Agricultural Economy Barometer from Purdue University and CME Group dropped to its lowest level since September in April. Put another way, the index, which survey’s 400 producers on their sentiment and opinions regarding the health of the agricultural economy, has only been lower one other time since 2016.  The percentage of farmers who considered now a good time to make large investments declined to 22% from 26% in March; the percentage who considered now a bad time increased to 74% from 69%. As for the trade tiff between the U.S. and china, 28% of farmers expected it to be resolved soon, down from 45%. More than a quarter, or 27%, said they expect their farms’ financial performance to be worse than last year. By comparison, when the same question was included in the April 2018 survey, just 19% expected worse financial performance for their farm than in the prior year.

Stocks Show It Hasn't Paid to Be Long on Donald Trump

SOUTH KOREA IS SINKING
In a bad day for emerging markets, with the MSCI EM Index dropping the most since October, the standout was South Korea. Its benchmark Kospi index of stocks tumbled 3.04 percent, making it the world’s biggest mover relative to recent trends as measured by Bloomberg. The country’s currency also fell, dropping to a two-year low. South Korea is falling victim to a series of aggressive acts by North Korea, which fired two short-range missiles Thursday to mark the country’s second test launch of weapons in less than a week. This is important because South Korea is a bellwether for global trade and technology. The weakness in its markets cast doubt over hopes for a rebound in the world economy. Just a few weeks ago, South Korea posted its biggest contraction of gross domestic product in a decade. South Korea’s economy is heavily dependent on exports, so it doesn’t help that the country’s shipments have declined since December amid a slowdown in global trade growth. In fact, global trade volumes are falling at the fastest pace since the depths of the financial crisis, according to data compiled by Bloomberg based on the trade monitor of Dutch Bureau for Economic Policy Analysis. It’s no wonder that economists surveyed by Bloomberg have boosted their odds of a recession in South Korea in the next 12 months to 20% from 10% back in November.

Stocks Show It Hasn't Paid to Be Long on Donald Trump

TEA LEAVES
With all the focus this week on the U.S.–China trade talks and whether the Trump administration will impose additional tariffs, it feels as if the consumer price index report due out Friday has been overlooked. That’s surprising given how it was just last week that Federal Reserve Chair Jerome Powell rocked markets when he said the recent slowdown in inflation was likely to prove transitory, prompting investors to immediately reduce the odds of an interest-rate reduction this year. The median estimate of economists surveyed by Bloomberg is for the government to say the consumer price index rose 0.4 percent in April, matching the gain in March.  Stripping out food and energy, the measure is seen rising by a more tame 0.2 percent. The thing to know about this report is that it rarely exceeds estimates. The last time it did was in January 2018, according to data compiled by Bloomberg. “We expect the report to provide evidence that the broad deceleration in inflation over the past several months is subsiding,” Bloomberg Economics’s Yelena Shulyatyeva wrote in a research note Wednesday. “While subtle, even a modest break from the relatively steady slowdown since the middle of last year will provide some hope that price pressures are firming.”

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.

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