Supercharged U.S. economic growth is distracting too many investors from the real dangers of a trade war to equity markets, a research firm said in a report this week, warning of a potential sell-off in stocks as early as this summer.
“Markets are far too complacent about trade war risks,” investment strategy and macro research firm TS Lombard wrote in a client note Friday.
The firm highlighted liquidity conditions and a rising dollar as bad for markets, while forecasting that a trade war would escalate until the U.S. midterm elections, at the earliest.
“These forces combine to make a summer sell-off in equities a risk that is too big to ignore.”
Many market watchers have for months been issuing warnings about trade war effects on equities, although despite a significant drop in late June over auto tariff threats from President Donald Trump, major U.S. indices have largely rebounded, with the S&P 500 and the Dow Jones surpassing the levels they reached before that dip.
Since Trump fired the opening shot on trade threats with his steel and aluminum tariffs announcement on March 1, the S&P 500 has grown by 5.05 percent, the Dow Jones is up 3 percent and the Nasdaq up 7.5 percent. Of course, this does not account for how much higher the indexes might be if there were no trade war fears, and does not factor in how much further this battle could escalate, TS Lombard said.
China on Friday announced it was prepared to impose tariffs on $60 billion worth of American goods if Trump unrolled penalties on more Chinese imports. He has already threatened to raise tariffs on $200 billion worth of Chinese goods to 25 percent from the 10 percent his administration is currently considering.