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Rallies, Recessions and Routs: Wall Street Handicaps a Trade War

(Bloomberg) -- Ask Wall Street strategists what equities will do in a trade war, and prepare to be confused.

According to Morgan Stanley’s Mike Wilson, too much tit-for-tat creates the potential for a recession. Chris Harvey, head of equity strategy at Wells Fargo, predicts a mere 5% decline for the S&P 500. JPMorgan’s Marko Kolanovic says the index will surge to 3,200 in the best scenario and sink to 2,550 should talks crash. In other words, either gain 11% or fall 11%.

It’s easy to blame trade for whatever just happened in stocks. But don’t try getting too firm a consensus on the future. Because nobody knows.

Rallies, Recessions and Routs: Wall Street Handicaps a Trade War

For now, traders are heeding the downside, ramping up hedges against future equity losses. In the options market, bearish bets have exceeded bullish ones by seven straight days, the longest stretch since December, when the S&P 500 fell to the brink of a bear market, data compiled by Cboe and Bloomberg showed. That’s a lot of demand for protection given the index was down only 4.5% from its peak at the nadir Monday.

Down 0.8% to 2,860 over the past five days, the S&P 500 had its first back-to-back weekly losses this year, halting a four-month, 18% rally. Below is a list of what other strategists say about the trade risk.

  • Barclays (Maneesh Deshpande): An all-out trade war would erase the market’s current valuation premium relative to the firm’s estimate, assuming the Fed doesn’t become more dovish in response
    • In that case, the S&P 500 could be down another 10% versus his year-end target of 2,750
  • Bernstein (Noah Weisberger): A permanent increase in tariffs on Chinese goods will raise costs for corporate America, shaving $4 to $8 from next year’s per-share earnings for S&P 500
    • Combined with a lower price-earnings ratio amid uncertainty over future growth, that would lead to a fair value of 2,650 for the index
  • BofA (Savita Subramanian): Under a full-fledged trade war, the S&P 500 could pull back 5-10% near-term, with potential to enter a bear market
    • Under a deal, S&P 500 could rally above 3,000
    • under a “brinkmanship” scenario where tariffs rise but a deal is eventually reached in the second half of 2019, the S&P 500 could pull back 5% ahead of an extended period of volatility

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