Investors’ risky bet: they can shrug off the trade war

AFTER a month of tumult, investors in American stocks are making peace with the trade war. The S&P 500 index is down by just 2.4 per cent since Donald Trump issued his “Liberation Day” proclamation. Stocks are still about 10 per cent below their all-time high in February, when investors expected the administration to do little except cut regulations and taxes. But they are not pricing in a recession, let alone a trade catastrophe. Analysts expect annual earnings growth of 12 per cent; stocks are almost where they were before Trump was elected.

Investors are being too sanguine. The tariffs America and China continue to levy on each other are so high that they amount to a near-embargo between the world’s two biggest economies. Trump’s swingeing “reciprocal” levies on most of the rest of the world have been postponed, not cancelled. China’s export orders are down and bookings for container ships to America have plunged. Businesses say they are cutting investment and consumers are increasingly fearful of unemployment and inflation.

The argument for a market rebound rests on three ideas. The first is that, notwithstanding an annualised contraction of 0.3 per cent in the first quarter, official data has yet to register the economic slump suggested by surveys. Second, markets now expect the Federal Reserve to cut interest rates by nearly a percentage point this year, which would boost growth and raise the discounted value of future profits. Third, and most important, Trump’s commitment to protectionism always seems to crumble under pressure. The latest climb-down came on April 29, when he eased the 25 per cent tariffs on cars and parts due to come into effect on May 3 by, for example, exempting cars from other duties.