The S&P 500 could be nearly 5% higher if it wasn’t for the trade war

Posted at 11:48 AM, Jul 02, 2019
and last updated 2019-07-03 07:19:08-04

Stocks are near record highs, but where would they be if not for the trade war?

Investors have been at the mercy of headlines, and sentiment has swayed in both directions since trade disputes between the United States and its allies escalated into mutual tariffs.

On Monday, global stocks moved higher after US President Donald Trump and China’s Xi Jinping agreed to a tariff ceasefire at the G20 meeting in Japan. The S&P 500 climbed to 2,964 points, an fresh all-time closing high, surpassing a previous record from June 20.

But on Tuesday, news of proposed US tariffs on $4 billion worth of imported goods from the European Union, along with worries about global growth, put a damper on things.

Despite hitting new records, the ups and downs of the trade war has left a dent in markets, experts say.

If you took out all the days, positive and negative, where trade impacted the market, the S&P 500 would be at 3,100 points, said Savita Subramanian, head of US equity and quantitative strategy at Bank of America Merrill Lynch said on a conference call Monday.

That’s a more than 4.5% gain that investors are losing out on, Subramanian said.

The trade war with China is far from over, because a ceasefire alone is no declaration of a lasting trade agreement. In fact, besides walking back a ban on American companies doing business with China’s Huawei, the G20 agreement had little new to offer, said Aditya Bhave, global economist at Bank of America said on the call.

“But no news isn’t necessarily good news if the status quo keeps getting worse,” he said.

And with trade talks between Washington and Beijing expected to pick up again, there is plenty of headline risk on the horizon.

“I think we’re very much in the eye of the storm in terms of this trade war,” said Ethan Harris, head of global economics at Bank of America. The trade theme will continue to dominate for the next year, just as it has done for the past year, Harris added.

The bank is forecasting the S&P to end the year at 2,900 points.

The analysts also said there won’t be a fully fledged trade deal without sufficient motivation. “No pain, no deal,” said Bhave on the call. This pain would have to come in form of economic slowing or a downturn in the market.

Meanwhile, stocks remain exposed to swings in sentiment and pressure in global supply chains.

“The number one risk to US equities from ongoing tariff talks is to margins,” Subramanian said. Globalization has been one of the biggest drivers of profit margin expansion for American companies. Moving to a more protectionist trade regime would change that.