As the trade war between the US and China continues to escalate the press seems to be making more of the issue than equity markets. Since hitting a June high of 25,322 the Dow Jones Industrial Average today stands at 24,618 which while a significant drop is not catastrophic. When you also bear in mind the all-time high of 26,616 was hit on 26 January 2018 perhaps the trade issue is not a major problem as yet.
The situation regarding the NASDAQ Composite index is even less concerning with the market falling from a June high of 7806 to 7706. The figure of 7806 is the all-time high for the NASDAQ Composite index which occurred on 11 June 2018. Indications suggest that the performance of companies such as Facebook and Netflix, both recently hitting all-time highs, has helped to support the index.
Trade talks imminent?
Each day seems to bring a new raft of tariffs for US/Chinese trade and only recently we saw European car manufacturers voicing their concern – many of which have factories in the US exporting to China. It is fair to say that Donald Trump has taken a somewhat aggressive approach to trade tariffs but as we have covered in recent articles, why should the US have a trade deficit with the vast majority of developed countries?
US authorities and their Chinese counterparts are certainly talking the talk in the press but can they afford to walk the walk for much longer? The simple fact is that both parties will come to an agreement in the short term, something they will both be able to sell to their supporters as a win. However, make no mistake this is the start of a new era, an era in which the US will be expecting trading partners to open more of their internal markets to US companies.
Export concerns hit Dow Jones industrial average
Even though the near 800 point drop in the Dow Jones Industrial Average is nothing to be ignored, in the context of long-term investment it may well be a buying opportunity. While it may take some time for the US economy to adapt to almost certain trade changes in the short, medium and long-term, the recent intervention of Donald Trump must surely be positive in the longer term?
The reason the Dow Jones Industrial Average has fallen is because of the level of physical exports to China as opposed to the likes of Facebook and Netflix which are technology-based. That is not to say that the Chinese authorities may not try to limit the reach of US-based technology companies but this is not as simple as it sounds. So, from a purely technology point of view it is no surprise to see the NASDAQ Composite Index remaining fairly steady while the Dow Jones industrial average index has reacted to a greater extent.
Conclusion
There is no doubt that Donald Trump is attempting to force his Chinese counterparts around the negotiating table to come to an “agreeable rate for future tariffs”. This tit-for-tat increase in tariffs is fooling nobody, they both need the relationship to work, as well as long-term visibility, and this will happen sooner rather than later – when the “real” talks finally begin.