Geopolitics: Trade War Talks Continue to Influence Stock Markets

U.S. stock markets continue to hover near record levels as trade policy conversations between President Donald Trump and President Xi Jinping define the relationship between the world’s two largest economies. The Dow Jones Industrial Average is currently trading just shy of 26,000, which is a psychological level that is often closely-watched by the financial markets.

Last week, the index experienced deep short-term losses, however, after a tariff increase by the U.S. went into effect. The new tariffs were imposed on $200 billion worth of Chinese products can still be removed but it appears that this will depend on the level of constructive dialogue generated between the two sides during their next meeting.

What this ultimately tells us is that geopolitics continues to influence the financial markets, even in cases where investor optimism seems to be propelling share prices to record highs. It can be easy to forget these types of factors when economic exuberance is present in the stock market. The corporate earnings season recently revealed relative strength in quarterly profitability, but it should also be remembered that these performances were based on weakened expectations.

As a result, stock markets could still be vulnerable at their elevated levels if disruptive trade talks lead to heightened market uncertainty. Of course, the equities market is a complex organism and gains or losses depend on a wide variety of moving parts that define global stock exchanges. Given the price fluctuations which have occurred after individual trade policy meetings between the U.S. and China, it is important to remember the impact politics is having on the financial markets.

trade war talks affect New York Stock Exchange.
Trade war talks affect New York Stock Exchange.

Exposure to Emerging Markets

Certain companies (i.e. Apple, Inc.) still have growing exposure to emerging markets, and second quarter revenues should reflect the impact trading disagreements have had on consumer behaviors. Shares of AAPL stock lost almost 7% last week, which accounts for substantial losses when we consider the fact that it is a trillion-dollar company.

At this stage, it looks as though there is no real rush between the two sides to complete a finalized U.S. – China trade agreement. President Trump has explained (through Tweets and other various sources) that trade tariffs have the potential to strengthen the United States economy. There are financial analysts on both sides of the debate, as far as the long-term economic impact these events will have at the global level. But the number of last minute changes these meetings seem to be generating has been striking, and it suggests market volatility could continue based on the uncertainty factor connected to the ongoing discussion.

The outlook for many companies hinges on a trade resolution, and the semiconductor sector is one industry that has been hit particularly hard by those uncertainties. One way financial analysts measure the progress of the chipmaker sector is through the VanEck Vectors Semiconductor ETF. Last week was the fund’s worst week of the year (with declines of nearly 6%). The S&P 500 also had its worst week of the year (with declines of almost 2.2%).

Trade War Talks Not Over Yet

Some analysts on Wall Street have said that investors must be prepared for the trade war tensions to drag on for an extended period of time. Although most expect a trade deal to materialize eventually, markets may need to experience periods of short-term pain until more clarity is made available. Stocks trading near their record highs may be most vulnerable to decline, with tech companies likely to remain vulnerable given their growing exposure to emerging markets.