Does Wall Street care about the trade war?

 

Critics of the US-China trade war argue that tariffs do more harm than good. Trade protection provides narrow benefits while generating widespread costs by raising prices for consumers and exposing exporters to retaliation.

These costs should show up on Wall Street.

In addition to shaking market confidence, the US-China trade war should have a direct effect on firms’ bottom lines—and their market valuation.

The problem with tariffs, economists tell us, is that they leave unprotected firms and average consumers worse off. Consider steel. Steel tariffs stand to benefit a few major producers employing around 140,000 Americans. Yet, those same tariffs raise prices for the many millions of workers in industries that rely on steel to produce finished goods.

It’s no coincidence that the announcement of steel tariffs in early 2018 sent US Steel (NYSE: X) prices up and Ford (NYSE: F) and Boeing (NYSE: BA) prices down.

What does the data show? Is there any clear relationship between major waves of tariff increases and Wall Street performance? The graph below shows Dow Jones daily closing values throughout 2018.

 
 

Did the trade war have any effect on Wall Street? If so, that effect was delayed.

The market had a lackluster spring, lagging behind historic highs reached in January 2018. But things looked positive throughout the summer. It was not until October that a noticeable downward trend emerged.

 
 

There are a couple of explanations for what looks like a delayed reaction:

  1. The third wave of tariffs dashed hopes that the trade war would be short-lived

  2. The adverse effects of tariffs did not start showing up until several months into the trade war

Either of those two possibilities could explain the roughly 3-month lag in the stock market’s reaction.

Future performance will be tied to any announcements around the March 1 deadline for US-China talks. If that deadline passes without progress, prices are likely to fall further, particularly after so much anticipation.