Lisa Shalett, Wealth Management Head of Investment & Portfolio Strategies

U.S. Investors may be getting inured to the impact of ongoing trade tensions. These disputes have been escalating steadily this year, yet U.S. markets have performed well. Non-U.S. markets have been impacted negatively, but that may have only contributed to investor assets moving into the U.S.

The next chapter of the trade story could change the narrative. I think U.S. markets could be vulnerable to a setback and international markets may benefit – whether trade relations improve or worsen. I see potential opportunities for investors in places like China, India, emerging Asia and Mexico – places where the worst trade outcomes may have already been priced in.

There are several converging story lines that lead me to this conclusion. Consider:

  • Trade impact may be reaching a tipping point.  Overstuffed global supply chains are already showing up in certain industries. Uncertainty around European and NAFTA negotiations could affect longer-range capital spending plans.

  • Midterm elections are coming and politics, not economics, is playing a role in decision-making on trade. That makes escalation of tensions more likely.

  • U.S. profit growth is peaking. Profit margins are starting to get squeezed by higher costs as the strong dollar bites into profits, labor costs rise and the business cycle matures. Fiscal stimulus that boosted U.S. profit growth is likely to fade by mid-2019.

  • A no-win for U.S. markets? If trade tensions escalate, it could slow global economic growth enough to affect US markets. If conflicts resolve, the dollar would likely weaken, increasing inflation and triggering higher interest rates, which would be a negative for U.S. markets.

 

Bottom Line: During the next round of trade skirmishes, it is hard to see how U.S. markets remain unscathed. Investors should keep an eye on upcoming S&P 500 earnings estimates to watch for downward revisions. Now is a good time to make sure you are diversified across international markets and even consider opportunistic investments in places like China, India and Mexico.