How Does the U.S. Current Trade Policy Affect the Stock Market?

The bulls have come back to Wall Street it seems, with Yahoo! Finance reporting that three major stock indices began June on a high note. Nasdaq composite closed at its highest since March 12, mainly driven by technology stocks that have surged lately, notably Apple, Microsoft, and Twitter. Both the Dow Jones Industrial Average (DJIA) and S&P 500 indices also recorded significant gains at the start of June, largely due to increased investor optimism. Even the Russell 2000 managed to close at an all-time high.

It remains to be seen, however, if the stock market can keep up this momentum, especially given the current administration’s trade policy, which is fast pushing the US into a seemingly inevitable global trade war as various countries look to turn the tables on President Trump.

Bear on the Prowl

Even as the stock market has turned bullish, it could quickly become bearish, and it will likely be caused by the aforementioned threat of a trade war. Recall that the stock market plunged as recently as April, calling to mind a similar downturn in early February, also this year. Time recounts that stocks plummeted after the Trump administration imposed 25% tariffs on imported steel and 10% tariffs on aluminum to protect U.S. jobs in both industries.

The possibility of a trade war, or at least the idea of other countries imposing tariffs on the US, clearly spooked the stock market back in April, with Morningstar analyst Andrew Lane noting, “Steeper tariffs increase the risk of retaliation from trading partners as well as unintended negative effects on the profits of U.S. industries that are heavy steel consumers.”

Unsurprisingly, companies that use steel and aluminum bore the brunt of the Trump administration’s decision to levy higher taxes. Automaker General Motors and construction equipment manufacturer Caterpillar were hit the hardest, with their shares falling by 4% and 3%, respectively. Beverage companies that use aluminum cans also saw their shares drop, with PepsiCo’s, for instance, declining by 1.5%.

A Policy of Restriction

The Trump administration’s trade policy is by and large one of protectionism, with the president seemingly in favor of imposing trade barriers to supposedly keep jobs in the country and to protect US industries from foreign competition. Trade barriers, of course, can take various forms as explained here on Value Stock Guide. They include, among others, import and export licenses, import quotas, subsidies, embargo, currency devaluation, and tariffs, which have arguably become President Trump’s preferred trade barrier. He has also been unafraid to withdraw from trade agreements which he deems unfavorable to the US, as he did in September of last year when he instructed his aides to withdraw from the US trade agreement with South Korea. He has even renegotiated the NAFTA, or the North American Free Trade Agreement, with Canada and Mexico.

But again, imposing tariffs is something the Trump administration has done quite a few times already. The aforementioned market plunge in April, in fact, was preceded by an uneven stock market, which took a significant hit after President Trump signed an executive memorandum imposing up to $60 billion on tariffs in Chinese imports. The DJIA, not coincidentally, dropped 724 points right after. Among the biggest losers in the immediate aftermath of the memorandum were Dow companies with large exports to China as investors worried about China reciprocating the president’s policy. That has not happened — not yet, at least — but the specter of that decision still looms over Wall Street two months later, even as the stock market has rallied rather remarkably.

Likely to exacerbate matters is the lack of any positive developments after the latest round of US-China trade negotiations held in the first weekend of June. Those meetings did not actually end well states Nadex, with China refusing to make concessions unless the US agreed to lift the tariff threats. This failure to come up with a resolution acceptable to both parties might just result to a full-blown trade war, with both countries levying higher tariffs and imposing trade sanctions on each other. Also worth keeping an eye on is the very real possibility of US allies, particularly Canada and the European Union threatening retaliatory tariffs against the US as well. Given these developments, the stock market’s bullish start to June may very well go for naught, with a bearish end to the month seemingly all but inevitable.

Protection from Protectionism

A market plunge will happen sooner or later, and accepting this as fact is vital for investors like you who must also keep tabs on the current administration’s next steps. Keeping abreast with trade policy developments will allow you to anticipate which stocks will be adversely affected when President Trump imposes new tariffs or when he pulls the US out of another trade agreement. That way, you can then cut your losses immediately and adjust accordingly. So, should a trade war with China happen, for instance, you know that companies with large exports to China should be off-limits as their shares would likely plummet.

For now, though, the stock market is still bullish, and it might be wise to strike whilst the iron is hot so to speak. After all, the tables might turn in a day or two, with the bull giving way to the bear once President Trump passes another one of his protectionist policies.

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