Market researcher Bespoke Investment Group did an excellent job this morning outlining present risks:   emphasis mine…

It is impossible to view the
announcement of expanded tariffs by the US last night as anything but a major
escalation. Thus far, every tariff announcement by the US has been responded to
in similar size with Chinese proposals, so China’s response is likely only a
matter of time.


In understanding trade “wars”, the
issue for equities is not the specific economic impact of a given proposal but
how it fits into the broader context of the negotiation underway. The business
models of countless US companies from Wal-Mart to Exxon Mobil to Citi depend on
low-friction movement of goods and capital around the global economy. Barriers
to that movement force changes in supply chains, have impacts on consumer
spending, and lower profitability as well as raising prices. To put this in
stock market terms, there is no reason to pay 16.5x next 12 months’ earnings
for a US equity market that has to unwind a generation’s worth of cost
optimizing and market access expansion. 

Furthermore, huge chunks of global
growth are predicated on very long, very complex supply chains. The apocryphal
pencil cited by Milton Friedman (link) as an example of Adam Smith’s invisible
hand has nothing on the series of complex relationships that result in an
iPhone, a car, or other modern goods. Those relationships, once disrupted, are
hard to put back together, and this escalating dispute has a nontrivial chance
of getting to that point.


The tariffs themselves won’t do it,
and they have yet to be implemented, but given that the US exports only $130bn
worth of US goods to China, to respond to the latest US escalation China may
need to pursue other measures. For instance: punitive regulatory enforcement
against US companies, letting non-US companies expand their activity in China,
or even expropriation of US-owned property. We should also note that the
policy’s defenders seem to argue that the tariffs are just a bluff when they
discuss the equity markets, while assuming that the Chinese can’t hear what
they’re saying. Best of luck with that.


While the bounce in equities may
continue near-term, the US stock market cannot take the implementation of tens
of billions of new tariffs on each side of the Pacific with equanimity. US
tariffs proposed thus far would not be implemented until May at the earliest,
so there’s ample time for another outcome. That’s why selloffs can be waved
off. However, as implementation dates approach and rhetoric continues to
spiral, it will become increasingly difficult for the market to ignore risks to
global activity posed by US policies.