The market sure loves contradictions.
The same week we learned that the White House is considering placing 25% tariffs on Chinese goods—and China explained how it would retaliate— Apple (ticker: AAPL), a company that does major business in the world’s second-largest economy, became the first U.S. company to reach $1 trillion in market capitalization.
And it wasn’t just Apple that had a good week. The S&P 500 rose 0.8%, to 2840.35, its fifth consecutive week of gains, while the Nasdaq Composite climbed 1%, to 7812.01—breaking a two-week losing streak. The Dow Jones Industrial Average, with its large weightings in trade-sensitive stocks like Caterpillar (CAT) and Boeing (BA), ticked up 11.52 points, to 25,462.58.
“It doesn’t matter until it matters,” says Quincy Krosby, chief market strategist at Prudential Financial, of trade tensions. “It’s almost as if the U.S. market has become immune to tariff headlines.”
The same can’t be said for China. Its Shanghai Composite index slumped 4.6% this past week and is now down 17% in 2018. Its currency, the yuan, fell as much as 1.2% this past week, before the People’s Bank of China intervention helped pare those losses. It’s not all about trade, of course. China’s growth was already slowing, and the PBOC has been easing policy at the same time the Federal Reserve has been tightening. “Where the U.S. is, from a cyclical perspective, a trade war is a little easier to deal with,” Deutsche Bank strategist Alan Ruskin says. “It ameliorates negative shocks for markets.”
Has it ever. The S&P 500 has gained 6.2% this year, but the higher the index goes, the greater the risk gets—and that’s beginning to worry some observers. Christopher Harvey, head of equity strategy at Wells Fargo Securities, argues that the fact that China has started to take steps to boost the economy with both fiscal and monetary tools, including tax cuts and lowered reserve requirements, suggests that it’s planning for the trade war to get worse before it gets better.
“The Chinese action suggests a shift in how they’re playing the game and implies they’re looking to stretch out the tariff time horizon,” he explains. “Further, higher U.S. stock prices are slowly beginning to shift the risk/reward.”
Slowly, however, doesn’t mean imminently. Harvey sees the U.S. market remaining strong for the next one to three months, with the S&P 500 eventually hitting a new all-time high. “If we are right and U.S. stocks do trend higher, we would likely suggest ratcheting down portfolio risk and taking on a more defensive stance when the S&P 500 is north of 2900,” he writes.
And what happens in China is unlikely to stay in China, says Jean Ergas, chief economist at Tigress Financial Partners. For proof, look no further than the events of 2015, when the yuan tumbled 2.9% over the first 13 days of August, precipitating an 11% drop in the S&P 500. “One of the great myths about the Chinese situation is that it’s all self-contained,” Ergas says. “But you can’t have something bad happen to the second-largest economy in the world and have it remain contained.”
And there’s no contradiction in that.
Write to Ben Levisohn at [email protected]