The Bull Marches On
As kids prepare to go back to school and families make plans for that last long weekend of summer vacation, investors enjoyed new highs for blue-chip stocks this week. Despite the ongoing uncertainty of trade policy, stocks continue to ascend a wall of worry, having digested another quarter of robust earnings growth in part the result of faster U.S. economic growth. Although the S&P 500 broke new ground above the 2,900 level this week, trading volumes were characteristically light ahead of the Labor Day weekend. Lighter trading volumes amid record-high stock prices may also reflect traders’ sensitivity to the administration’s ongoing efforts to remake the North American Free Trade Agreement, most commonly known as NAFTA.
Free Trade Anyone?
As the last of second quarter earnings reports wrapped up this week, and with limited economic news of consequence, investors’ attention increasingly focused on the melodrama of trade talks with Mexico and Canada. After months of dialogue, the U.S. reached a preliminary trade agreement with Mexico that promises to increase the proportion of auto content derived from North America while also instituting rules boosting the percentage of such content manufactured by employees earning wages of at least $16 per hour. We read the explicit linkage of wage rates to content as an attempt to prevent an increasingly complex supply chain from taking advantage of low cost emerging market content that often crosses borders multiple times before final assembly of a car or truck is complete.
One Down, Another to Go
Progress on a new trade agreement with Mexico has prompted Canada to reengage in talks, but a new trade protocol with our northern neighbors has yet to be reached. Success in Canadian – U.S. negotiations is critical to the ultimate rewrite of NAFTA, because without it Congress is unlikely to ratify a new bilateral agreement with Mexico. In other words, NAFTA is unlikely to become “MFTA.”
China, You’re Next!
While trade policy has yet to materially impact the U.S. economy, tariffs in place are already distorting certain markets like agriculture (through reduced U.S. soybean and pork exports to China), motorcycles (Harley-Davidson making plans to manufacture motorcycles outside the U.S. to escape Europe’s retaliatory tariffs) and bourbon (Brown-Forman suffering the earnings impact of retaliatory tariffs on its exports to Europe). As well, the U.S. administration is signaling additional tariffs on $200 billion of Chinese imports that could be announced next week. If the 10 percent import tax that has been advertised is ultimately assessed on such a significant new swath of Chinese goods, protectionist trade policy could start to more meaningfully impact the economy as importers pass on the higher cost of goods to consumers. While we don’t anticipate trade skirmishes metastasizing, a risk is that the Fed’s so-far measured pace of interest rate increases could quicken if a trade war resulted in a faster rate of inflation.
Takeaways from the Week
- Blue-chip stocks forged new all-time highs on light trading volume
- With earnings season complete, trade policy is capturing investors’ attention