Investor fears of over geopolitical instability and an impending global trade war have taken U.S. equities on a roller coaster ride in 2018, sending the nine-year bull market into a period of sustained volatility and leading some on the Street to become more bearish regarding a forthcoming market correction. According to one quantitative strategist, President Donald Trump's trade tactics and rhetoric have wiped over $1 trillion in market value from U.S.-based corporations, reported CNBC. (See also: Why Bridgewater Calls 2019 a 'Dangerous Year'.)
“By attributing the trade-related news flow (positive or negative) to the performance of the U.S. market, we estimated the impact on U.S. equities to be negative 4.5 percent" since March, wrote J.P. Morgan's Marko Kolanovic in a note Wednesday. "Taking the current market capitalization, this translates into $1.25 trillion of value destruction for U.S. companies. For a comparison, this is about two-thirds of the value of total fiscal stimulus."
Trump has threatened global trade agreement such as NAFTA, and has announced a wave of new levies on imports such as steel and aluminum. The U.S. is now facing potential retaliatory tariffs on goods such as pork, peanut butter and motorcycles, wrote CNBC.
Extended Period of Uncertainty
The head of Morgan's global quantitative and derivatives strategy group has been bullish on the market overall, yet sees protectionist ideology as a "significant" market headwind. While a "negotiation strategy that includes bluffing/threats can be successful in a two-party negotiation setup," it "is more likely to deliver self-defeating results in a complex system such as global trade," wrote the strategist. He expects the market to rally roughly 4%, nothing that trade war effects could be reversible if policies are reversed and citing the positive impact of fiscal measures to remain.
However, "if this uncertainty hangs over the market for a more extended period of time, the damage becomes more permanent," wrote Kolanovic, adding that trade tensions tend to negatively impact investor psychology and business confidence.
Meanwhile, some market watchers, including former New York Federal Reserve bank economist and Yardeni Research President Edward Yardeni, argue that Trump's trade talk should be taken with a grain of salt. In an interview with CNBC, Yardeni called the commotion in Washington "noise" that is causing unnecessary market anxiety, forecasting the S&P 500 to reach 3,100 by year's end. (See also: How Goldman's Hedge Fund Picks Beat the Market.)