Stocks Rebound as Investors Learn to Live With Trade War

U.S. equity markets have already priced in the additional tariffs, Goldman Sachs says
September 10, 2018 Updated: September 10, 2018

WASHINGTON—Despite the uncertainty surrounding the trade war with China, U.S. equity markets had a relatively strong opening on Sept. 10.

President Donald Trump has continued to target China, recently announcing that he is ready to levy tariffs on basically all of the goods that the Chinese import to the United States.

“I hate to say that, but behind that, there’s another $267 billion ready to go on short notice if I want,” he told reporters on Sept. 7. “That totally changes the equation.”

While Asian markets declined on fears about Trump’s tariffs, U.S. stocks began the week strong, with major indexes rebounding from the previous week’s losses.

According to Goldman Sachs, financial markets won’t crash because of additional tariffs, as investors have already priced in the likelihood of an escalating trade war.

“We believe the U.S. equity market reflects an expectation of additional tariffs,” Goldman Sachs analysts said in a report dated Sept. 8. The stocks “would likely be higher without the trade risk.”

The performance of the S&P 500 has a close relationship with the ISM manufacturing index, but the stocks’ recent performance has “undershot” the level implied by the index, showing that the bad news is already reflected in the prices, the report said.

In addition, U.S. stocks with a high exposure to China have underperformed the broader S&P 500 index since mid-June, when the White House announced the first tariffs.

Investors are concerned that additional tariffs, especially if they are met with retaliatory actions, could raise consumer prices and stall economic growth.

Goldman Sachs, however, says the effect of the tariffs will be modest.

“If all of the proposed tariffs were implemented, they could boost core PCE inflation by around 0.3 percentage point year-on-year,” according to the report.

The Trump administration had previously imposed tariffs on $50 billion worth of Chinese products, and is ready to impose additional levies on $200 billion this week.

In response to Trump’s recent comments, Chinese officials said Sept. 10 they would “take countermeasures” if Washington escalates the tariff war.

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