The potential for a full-blown trade war is worrying some investors, fund managers and economists, but active traders are taking it all in stride. That's been the message out of TradeStation customers who have continued to invest and trade despite worries that tensions with China could result in a protracted trade war that affects global economic growth.
"The [trade war] story has been active for a long time. Traders are turning their attention to the reality of earnings," said David Russell, vice president of content strategy at TradeStation, in an interview. "Trade war has been in the headlines for several months. Earnings are a clear catalyst. They are a lot easier to understand."
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Ever since President Donald Trump followed through with his promise to slap tariffs on imported aluminum and steel as well as billions of dollars of goods coming from China, concerns have been mounting that the world could end up in a protracted trade war. Those prospects tend to ebb and flow based on negotiations between the U.S. and China and tweets coming from President Trump.
In the latest salvo in the tariff battle, Trump told CNBC in an interview that he is willing to place tariffs on every product imported from China if he has to. So far, the U.S. government has instituted $34 billion of tariffs on Chinese products, which was swiftly met with retaliatory levies by China. While that could affect a lot of U.S. companies with global operations, including technology and semiconductor firms, active traders haven't been too worried. They are focused on corporate earnings, which are expected to see another quarter of double-digit growth.
On top of that, investors, particularly active ones, are getting tired of the headline news and seem to have a greater awareness of the positives in the market such as tax cuts that lowered the corporate tax rate to 21% from 35%. Russell pointed to President Trump's threats a few weeks ago that he was placing $200 billion more of tariffs on Chinese products. The markets largely shrugged off his comments, and the same has happened with his most recent proclamation. While placing levies on all of the products coming from China would have huge implications, stocks are down only a little bit in trading on Friday, July 20, and the stocks on the Nasdaq are trading higher.
"People get tired of hearing the same thing every day. The whole idea of a trade war is crying wolf for a long time," said Russell. "The fear has been out there. At a certain point in time, that loses credibility." According to the TradeStation executive, while tariffs are getting a lot of coverage, TradeStation investors are focused on stocks on a case-by-case basis and are looking at other sectors such as oil and energy. "Oil is a bigger story. It has nothing to do with tariffs and everything to do with OPEC. Trade wars seem to matter less to active traders," he said.
Active traders may not be concerned about trade wars, but fund managers polled by Bank of America are. In its July survey of funds that collectively manage $663 billion, Bank of America Merrill Lynch found that 60% of the fund managers polled have reduced their equity exposure by 14 percentage points and now are 19% overweight, which Reuters pointed out is the lowest since Trump was elected in 2016. The majority of fund managers named a trade war as the biggest risk, while 19% said a hawkish mistake by the Federal Reserve or the European Central Bank was the largest risk to stocks and 6% pointed to a euro area and emerging market debt crisis.
The survey also showed that the lowest number of fund managers since February of 2016 think the global economy will be stronger in 2019. Based on the survey carried out from July 6 through July 12, a net negative 11% think the economy will be stronger a year from now. At the beginning of 2018, that stood at a positive 40%.