The stock market feels trade war looming

The potential fallout from said war ranges from higher inflation to higher interest rates, a more aggressive monetary policy and even increased tensions with trading nations. All these factors would ultimately offset the potential benefits of the stimulative tax cuts, at least in part.  

“If several of the world’s largest economies fall into a trap of ever-escalating trade sanctions or self-imposed embargoes, there is some modest probability (perhaps 10%-20%) that global growth will be truly undermined,” said a note signed by Citi Private Bank‘s gloval chief investment strategist – Stephen Wieting.

Added to that, Wieting feels that a potential increase to tariffs could negatively affect the “growth versus inflation balance”, while having a negative effect elsewhere as well.

The stock market ebbed and flowed last week, with the main indexes posting losses.

The industrial sector was the biggest loser. The Dow Jones Industrial Average dropped for 4 sessions in a row, tallying a weekly loss of 3%. The S&P 500 saw its industrial sectors lose 3.3% through the week.

The S&P experienced a hard drop on Thursday after President Trump made the tariff announcement, but bounced back slightly on Friday. The recovery made it so that its total weekly loss was only 2%. Rounding out the main indexes, the Nasdaq Composite experienced a 1.1% weekly loss.

The Cboe Volatility Index for the S&P 500 grw from 19% to 19.59%. Over 2017, the index stood firm around 11%.

Invesco chief global market strategist Kristina Hooper believes that stocks are still somewhat bloated, but she expects only modest returns this year.

“Tariffs are like gremlins, they multiply quickly given a conducive environment. And when it comes to the stock market performance, much will depend on how retaliation occurs,” Hooper said.

“Full blown trade wars put the Fed between a rock and a hard place, just like the Bank of England finds itself right now,” she added.’

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