Donald Trump's protectionist instincts have gotten the better of him lately. How worried should investors be by the prospect of trade wars? Until last week, investors were hoping Trump's senior economic adviser, former Goldman Sachs banker and free trader Gary Cohn, would rein in the president. Cohn's departure from the administration, after losing his battle against US tariffs on steel and aluminium imports, is a blow – "terrible", to quote JPMoran chief Jamie Dimon.
Like Dimon, markets are wary of the economic nationalism espoused by Wilbur Ross and Peter Navarro, whose ideas have been described as the "economic equivalent of creationism" by former US treasury secretary Larry Summers. Investors' fears were reflected by the negative initial market reaction to Cohn's departure last Wednesday. However, the steep losses were short-lived, with the S&P 500 rebounding to end the day largely unchanged.
Investors are hoping common sense will ultimately prevail, that the checks and balances in the US political system will prevent an escalation of a full-blown trade war. Investors will also be relieved that Trump, who views the bull market as a vindication of his economic policies, keeps a close eye on market movements. New York Times White House sources last week reported Trump was "mindful enough of the arguments against potentially tanking the stock market". The only problem is Trump is liable to misinterpret market movements. Markets rallied shortly after he announced his tariff plans a fortnight ago, mainly because stocks were technically oversold and investors believed Trump would be dissuaded.
However, Trump reportedly interpreted the rally as vindication of his plans. Emboldened, he pressed on, and Cohn quit. The good news, then, is Trump’s responsiveness to market movements may prevent him from doing anything too silly. The bad news is stocks may need to temporarily suffer for him to understand that markets really, really don’t want a trade war.
Bull market celebrates its ninth birthday
The US bull market celebrated its ninth birthday last week. Will it make it to 10? Sceptics note this is now the second-longest and second-strongest bull market in history, surpassed only by the 1990s rally that ended when the dotcom bubble burst in March 2000. There is also no shortage of things to worry about, ranging from the possibility of trade wars to inflation to valuations and geopolitical concerns. Still, there are always things to worry about, and bulls argue current concerns are neutralised by a synchronised global economic recovery and surging corporate earnings.
As for the rally being long in the tooth, bull markets die of excess – “overspending, over-leverage, overconfidence”, as LPL Research’s Ryan Detrick puts it – rather than old age. The usual warning signs just aren’t there, says LPL. Recession risk remains minimal. Market breadth is healthy, with most sectors remaining in uptrends. Equity inflows have not been excessive and activity in initial public offerings (IPOs) has been muted. This all suggests that despite the recent correction, this ageing bull market has “quite a bit left in the tank”, says LPL, and will likely celebrate its 10th birthday this time next year.
Bullish sentiment plunges among ordinary investors
Ordinary investors got a little exuberant as stocks soared higher in January, but the market correction has washed out that optimism. The latest American Association of Individual Investors (AAII) poll shows bullishness has experienced its largest two-week decline in almost five years. It “didn’t take much for the individual investor to sour on equities”, notes Bespoke Investment.
For almost three years, sentiment was decidedly lukewarm, with less than 50 per cent of investors describing themselves as bullish. In December, bullishness finally exceeded 50 per cent and reached a seven-year high in early January – just in time for the correction.
It’s not that investors have thrown in the towel and capitulated – the latest survey shows most investors have a neutral rather than a bearish outlook. Still, bulls will be encouraged that signs of excess have been wrung out of the market so quickly. “It is not euphoria when sentiment measures spike to extreme levels on every minor pullback,” says New York-based money manager Joe Fahmy. “The majority of people consistently have one foot out the door, and every time we see a quick correction they rush for the exits.”
Markets need more women, says Merrill
Fewer women (seven) head FTSE 100 firms than men called David (nine), according to data published by UK-based charity INvolve last Thursday, International Women's Day. This lack of diversity may be costing companies and investors, according to a new Merrill Lynch report. Companies with more gender diversity are characterised by lower share price swings, more stable earnings and higher returns on equity, the report found. The perils of under-representation are especially marked in an industry like retail. Just 30 per cent of board members are women, notes Merrill, while the average board member is aged 62 – not sensible for an industry mostly targeting young women.
