Markets & Economy
What Jitters Over Trade Indicate About MarketsAugust 8, 2019
- The recent spike in volatility amid rising concerns over U.S.‑China trade relations indicated that the medium‑term fate of markets will be heavily influenced by how the dispute is resolved.
- A deterioration in relations between the two countries is likely to lead to further bouts of volatility—and possibly a more serious downturn.
- “Timing” the market in this environment will be very difficult. Selectivity is more likely to deliver durable returns during difficult periods.
The recent bout of market agitation over fears of an escalating trade war provided a stark reminder of just how influential US‑China relations are on the global economy. While support remains in place from continued positive corporate earnings growth and accommodative central banks, any worsening of the trade dispute could bring further bouts of turbulence, possibly leading to a more sustained correction. Attempting to time the markets in this environment will be very risky, meaning that investors will likely need to be highly selective if they are to successfully navigate the difficult period ahead.
U.S.‑China Trade Tensions Blow Up Again
What a difference a few days can make. For much of the first half of this year, investors seemed assured that slowing global growth would be mitigated by accommodative monetary policies from the U.S., Europe, and emerging markets. While trade tensions ebbed and flowed, the markets chose to believe that common sense would prevail and that a “muddle through” scenario would play out. Rising asset prices reflected this view.
That all changed at the beginning of August when U.S. President Donald Trump announced new tariffs and China swiftly responded by allowing the renminbi to depreciate, prompting accusations of currency manipulation from the U.S. The sudden deterioration in relations between the two countries caused markets to sell off dramatically before stabilizing partially after Beijing stepped in to steady the currency. Any complacency over the U.S.‑China trade dispute was wiped out in a matter of days.
Subsequent twists and turns in this saga, including the imposition of new tariffs and a possible currency war, have the potential to disrupt markets with an immediate and direct impact.
“Given the pace at which things change in trade negotiations, it is likely markets will continue to react to headlines and tweets for a while,” says Andrew McCormick, head of Fixed Income. “We are no longer pricing in a rosy scenario.”
The depth and complexity of the U.S.‑China trade dispute means that it is very difficult to predict how negotiations will progress from here. “There have always been two issues,” says Fixed Income Sovereign Analyst Chris Kushlis. “First, the narrow trade issue, and second, the longer‑term, geo‑strategic rivalry—and it has been very hard to keep those on separate tracks. For a while, it seemed as if it might be possible to craft a narrow trade deal with limited substance, but even that now seems unlikely.”
What President Trump does from here will likely depend on what he believes will best enable him to get reelected as president next year, Kushlis believes. “What serves President Trump better: striking a trade deal or positioning himself as a ‘trade warrior’ and hoping that Fed interest rate cuts bail him out?” he says. “The Chinese are likely to dig in—they will not want to reward any pressure tactics from Trump. Overall, this is not good for anybody. There are no winners—just relative losers.”
...twists and turns in this saga, including the imposition of new tariffs and a possible currency war, have the potential to disrupt markets with an immediate and direct impact.
Lack of Consensus on Strength of Global Economy
The potential impact of a worsening U.S.‑China trade dispute on markets depends largely on the underlying strength of the global economy. Here, views differ, reflecting the strength of T. Rowe Price’s diversity of thought among its investment professionals.
Head of Global Multi‑Asset Sebastien Page acknowledges that there are concerns that the current extended cycle is fragile, but he says he does not believe the conditions are in place for a severe downturn. “We recognize the fragility of an aging cycle,” he says, “but we don’t see major speculative imbalances that could trigger a crisis.”
Charles Shriver, co‑head of the T. Rowe Price Asset Allocation Committee, agrees. He argues that while continued volatility can be expected, conditions remain supportive. “The monetary policy environment is supportive, with the recent Fed rate cut and the likelihood of further action to offset weak growth, trade uncertainty, and tighter financial conditions,” Shriver says.
Other portfolio managers, particularly those in fixed income, are more cautious. Quentin Fitzsimmons, senior portfolio manager in the Fixed Income Division, believes that a breakdown in talks could push a fragile global economy over the edge. “I believe that the current situation has the ingredients of a full‑blown international crisis,” he says. “There is a confluence of factors—U.S. politics, Chinese politics, the global economic cycle, the rise of populism, and the impact of technological change on key industries. All of these have been around for a while, but they seem to be coming to a head at the same time.”
“I see parallels with 2007, just before the global financial crisis struck.”
...selectivity is key to tuning out short‑term noise...
When uncertainty is elevated, timing the markets—always a risky endeavor—becomes virtually impossible. At T. Rowe Price, we believe that selectivity is key to tuning out short‑term noise in favor of durable, consistent returns. Our portfolio managers average 22 years in the industry and 17 years with T. Rowe Price, so they’ve weathered all kinds of markets. We’ve learned that volatile periods are often the time to buy good businesses at attractive valuations.
Against that backdrop, here are some notable trends we’re observing:
WHAT WE’RE WATCHING NEXT
The unpredictable nature of the U.S.-China trade dispute means that it is difficult to predict when the next developments will occur, but we will be monitoring this situation very closely for the foreseeable future. U.S. President Donald Trump’s next move should tell us something about his long-term objective: Will he tone down the rhetoric and focus on trying to strike a deal with the Chinese (in which case, the economic cycle may be extended further)? Or will he dial up the pressure in a bid to position himself as defender of the U.S. economy ahead of next year’s presidential election (in which case, brace yourself for further volatility)?
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.
Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.
Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. Stock prices can fall because of weakness in the broad market, a particular industry, or specific holdings. Bonds may decline in response to rising interest rates, a credit rating downgrade or failure of the issue to make timely payments of interest or principal. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets. All charts and tables are shown for illustrative purposes only.
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