The trade war between the U.S. and China is escalating with no end in sight, increasing the likelihood that the stock market will be gripped by high volatility and sharp plunges for the foreseeable future, according to several investors and market watchers. In recent months, many of the major moves in the market have correlated with new developments in the trade conflict, or shifting expectations about its future course and the likelihood of a timely resolution.

“It is possible we will still see trade volatility and trade tensions all the way up until the election, because it is a strong political position,” David Kelly, chief global strategist at JPMorgan Asset Management, told The Wall Street Journal. In a bearish sign for technical analysts, both the S&P 500 Index (SPX) and the Dow Jones Industrial Average (DJIA) dipped below their 50-day moving averages earlier this week. However, both indexes have remained above their 200-day averages, and the S&P moved just above its 50-day average by early afternoon Thursday, as detailed in the chart below.

Technical Indicators Hover Near Bearish Levels

(As of 12:45 PM Eastern Time, May 16, 2019)

S&P 500

  • Current value: 2,887
  • 50-day moving average: 2,867
  • 200-day moving average: 2,776

Dow Jones Industrials

  • Current value: 25,920
  • 50-day moving average: 26,062
  • 200-day moving average: 25,426

Source: Barchart.com

Significance For Investors

A positive technical sign is that, in addition to the S&P 500 as a whole being above its 200-day moving average, so are 58% of the stocks that constitute it, per analysis by Dow Jones Market Data cited by the Journal. While this is above the 39% figure at the end of 2018, it nonetheless is sharply below the recent high of 73% reached in April.

As recent evidence of how the trade situation is roiling the markets, on Monday stocks plummeted after China announced tariffs on about $60 billion of imports from U.S., then rallied for several days after President Trump indicated that a trade deal will be forged "when the time is right," as quoted by the Journal. Some investors anticipate that Trump is far from done with actions on tariffs, trade, and protectionism, meaning that these will remain big political issues, and thus big movers of stock prices, from now through the 2020 elections.

Adding to the uncertainties about trade, there is the possibility that the tariffs imposed by Trump, such as those on all imported steel and on various imports from China, are likely to be a permanent protectionist move, and not just bargaining chips in trade negotiations, according to a detailed analysis in The New York Times. The U.S. now has a trade-weighted average tariff rate of 4.2%, according to Torsten Slok, chief economist at Deutsche Bank Securities, per the Times. This is higher than each of the other six other G-7 industrialized nations, more than double the figures for five of the six, and even higher than most emerging markets countries, including China and Russia.

This week, investors will be anxious to see if Trump makes good on prior threats to impose global auto tariffs, which could shatter the brief rally in stocks. This move has drawn criticism from auto makers and policy analysts alike, and also would sharply raise car prices for consumers.

Looking Ahead

Upheaval stemming from trade wars may look benign if the forecast of a prominent longterm bear is correct. Albert Edwards, the co-head of global strategy at investment banking firm Societe Generale, says the markets are heading toward a financial and economic "Ice Age." Under that scenario, an onslaught of severe deflation will send U.S. and European bond yields and stock prices crashing. Edwards says the experience of Japan after its credit bubble burst in the late 1980s is the template for his dire scenario.