How the Trade War Affects Investors

(Bloomberg) -- Investors are watching as the world’s two largest economies dance around a trade war.

Tensions appeared to ease Thursday as Beijing held off retaliating against additional tariffs of $200 billion on Chinese imports proposed this week by President Donald Trump. Stocks rallied, with the S&P 500 Index closing at its highest since February.

Still, investors remain wary as they await potential reprisal from China and economists warn that a trade war could fuel inflation and possibly result in job cuts and plant shutdowns in the U.S.

Here’s what some money managers and strategists think about the risks:

Earnings Remain the Story

Jurrien Timmer, director of global macro at Fidelity Investments

“Trade tensions are a headwind but the market has been able to shrug it off because the tailwind from the earnings boom is so big. The backdrop is one that forgives a lot that is going on. I think there is enough self-interest on all sides so that if things get out of hand there will be ways to walk them back.’”

Play the Probabilities

Scott Wren, a senior global equity strategist at Wells Fargo Investment Institute

The probability of a full blown trade war is “relatively low” and not worthy of investors re-positioning their portfolios, Wren says. President Trump is playing hardball. “The U.S. is the top customer for all its major trading partners and we have some leverage here,” he says, adding that global tariffs are likely to fall once the current spat is over. “This is short-term pain for long-term gain.” In Wren’s mind, the two biggest risks facing investor portfolios in 2018 are a slowdown in global growth or the Federal Reserve raising interest rates too quickly.

But Rates May Be Part of the Trade Story

Dan Fuss, manager of the Loomis Sayles Bond Fund

“This is bad news for business and bad news for international tensions. It could derail the Fed’s moves toward higher interest rates although probably not right away. We are asking our analysts to keep their eyes out for signs that companies are pulling back or slowing hiring. In my experience, you don’t see economic slowdowns until they are underway.”

Tune Out the Trump Tweets

Rebecca Patterson, chief investment officer, Bessemer Trust

"While we have clearly seen that the President’s communications can move specific stocks and even markets over the very short term, for us it’s more compelling to position around the economic outlook. We can have a much higher degree of confidence in how the economy will impact companies and various asset classes."

Consider Inflation

Richard Bernstein, chief executive officer of Richard Bernstein Advisors

"With the economy as tight as it is, it seems to me that any restriction on the flow of goods and services will be inflationary no matter what,” Bernstein says. The more severe the trade restrictions get, the higher inflation will climb. But with rising inflation comes investment opportunities. Bernstein says the majority of equity managers are underweighting traditional sectors that would benefit the most from increased inflation, such as energy, industrial or materials. “It’s as if the era of deflation is so ingrained in people’s heads that they can’t imagine an extended period of accelerated prices,” he says.

Or Consider Ignoring It All

Dan Egan, director of behavioral finance and investments, Betterment

There is “zero return" on paying attention to the daily news cycle on the trade battle. "You’re not going to get ahead because you pay attention to it; you’re more likely to tune your portfolio and chase performance and end up worse off,” Egan says. "Right now there is lots of news and noise and chest pumping, which is a normal part of the current administration’s way of negotiating, and a key thing to remember is if you try to react to the news the markets will react far, far faster than you."

Risks Are Hard to Spot

Sam Stovall, chief investment strategist of U.S. equity strategy at CFRA Research

"There is a very big question mark over how all of this will play out, but it seems as if Wall Street doesn’t really care right now because of the market movements," Stovall says. Investors’ intuition may be to find stocks that are less exposed to international trade, but countries, industries and businesses are increasingly intertwined. Just trying to determine the number of S&P 500 companies that receive revenues from overseas operations is difficult because foreign revenues don’t always have to be broken out, he says.

Watch Corporate Sentiment

Ben Mandel, a global strategist at JPMorgan Chase & Co.’s asset-management unit

He predicts high volatility as the market adjusts to the periodic shocks that go with trade negotiations, but says the market has been quick to recover on policy announcements so far. Over the past 18 months, the S&P 500 has fallen 30 basis points on the day of a trade policy announcement, but bounced back by one percentage point on average over the next five days, according to an analysis by JPMorgan. But too many trade battles could eventually affect corporate sentiment, he says. If that gets bruised, there will be less hiring, less capital expenditure and a noticeable dent in the economy.

Most of This Is Priced In

Kenneth Taubes, chief investment officer, U.S. Amundi Pioneer

“So far it is more smoke than fire. I don’t think there is enough to change the direction of anyone’s economy, neither the U.S. nor China. As for the markets, a lot of this has already been discounted.”

Just Hope Tech Stays Out of It

Eric Freedman, chief investment officer at U.S. Bank Wealth Management

If trade negotiations start to focus on the technology realm, that could be "the proverbial fuse that lights a broader issue,“ Freedman says. A significant amount of market growth expectation is centered on the tech industry and if it becomes a bargaining chip between the two economic powerhouses, tech company chiefs could become more skittish about expanding. Freedman says that Trump and Chinese President Xi Jinping are "capital market conscious" so will likely move in increments to avoid sparking a shock wave.

To contact the reporters on this story: Olivia Carville in New York at ocarville1@bloomberg.net;Charles Stein in Boston at cstein4@bloomberg.net

To contact the editors responsible for this story: Pierre Paulden at ppaulden@bloomberg.net, Steven Crabill, Peter Eichenbaum

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