Can Trump’s trade fight ruin the longest economic expansion in history?

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So near but so far.

The longest economic expansion in U.S. history is within reach, but a period of tariff escalation between the U.S. and some of its closest global trading partners is producing headwinds to burn a lasting record growth, exceeding 120 months.

According to the official arbiter of the economic health of the United States, the National Bureau of Economic Research, at the end of this month, the current expansion that began in June 2009 will match the longest on record, from March 1991 to March 2001.

However, recent action in May laid bare the fragility of the current state of global markets, and indeed economies.

President Donald Trump on Thursday night threatened to tax all Mexican imports starting June 10 unless Mexico stems the flow of undocumented migrants to the United States

The threat represents just another front in a tariff tango that has recently centered primarily on US-China aggression over trade rights that resurfaced on May 5.

Trump’s surprise tariff proposal on Mexico, one of the United States’ closest trading partners, goes far beyond a tax on avocados and other products and extends to broader areas , including commodities, automobiles and auto parts.

“Imports from Mexico in 2018 totaled $346 billion, with the largest category being automobiles and auto parts. It would be a tax on the auto supply chain that would ultimately be borne by American automakers and consumers, adding to inflation and undermining growth,” wrote Tony Roth, chief investment officer at Wilmington Trust.

While it seems unlikely that the U.S. president will follow through on Mexico tariffs (or that Congress will allow it), the latest trade move raises new uncertainty about the president’s strategy and how far. in which the market and the economy can withstand the strain. .

“The narrative has always been that tariffs are a means to an end, but when they become the end itself, it’s time to worry,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. , to MarketWatch.

Brad McMillan, CIO of Commonwealth Financial Network, told MarketWatch via email, “Mexican tariffs would be another unnecessary headwind, but the main effect would be on confidence. If hiring slows or consumer confidence drops, which could easily happen, then we could move into a pre-recession phase.

Tariffs are a tax on U.S. consumers because they theoretically result in higher costs on products if passed on by importers, but a tariff fight on multiple fronts also makes it difficult for U.S. multinationals to make investment plans in the face of the threat of a total crisis. blown war and retaliation from international business partners (as reflected in the following tweet from asset manager Nuveen).

“This latest round of tariffs will create economic uncertainty, and economic uncertainty creates wealth destruction,” said Jack P. McIntyre, portfolio manager for global fixed income strategies at Brandywine Global.

Indeed, trade animos erased $1.6 trillion, or 6.6%, from the S&P 500 SPX index,
-0.72%
in May, according to FactSet data.

Read:Here’s the damage done to the stock market since Trump’s trade tweet on May 5

“If these economic tariffs are to continue, it will undoubtedly have an impact on the American economy, and therefore by extension on the American consumer.”

McIntyre also said the bond market’s calls couldn’t be clearer on how fixed-income participants feel about the economic outlook, given the current woes. The yield of the 10-year Treasury bills TMUBMUSD10Y,
1.927%
fell 8.9 basis points to a 20-month low of 2.139%, extending its weekly decline to 18.9 basis points and its monthly decline to 36.7 basis points.

“While the US economy performed well in the first quarter, we shouldn’t use that as a barometer for the rest of the year. The global economy remains weak and the United States does not exist in the bubble. Indeed, the US Treasury market tells us that the economy will slow down.

To verify:May stock market sell-off marks key monthly reversal that ‘portends deeper declines’, technician says

The short-term 2-year Treasury note TMUBMUSD02Y,
1.469%
to 1.937% marked its biggest monthly decline since 2008, and now reflects heightened market bets that the Federal Reserve will cut key federal funds rates, currently in a range of 2.25% to 2.50%, two times in 2019.

The bright side

Of course, not everyone thinks the tariffs will undo the already historic bull run for equities let alone halt the continuation of the longest period of economic growth.

McMillan, from the Commonwealth, said it was difficult to turn around an economy that continues to grow, especially with a labor market showing no signs of slowing: “With strong hiring and confidence, an immediate recession seems unlikely. . We have never had a recession with hiring and consumer confidence at current levels. He acknowledged, however, that the risks of recession are increasing.

Admittedly, the month of May put an end to the upward trend that began this year, but the main benchmark indices remain in positive territory. The Dow Jones Industrial Average DJIA,
-0.68%
is up 6.4% so far in 2019, the S&P 500 index has gained 9.8% and the Nasdaq Composite Index COMP,
-1.23%
was up 12.3% towards the middle of the year.

Many strategists say buying stocks is still an option, even if the market continues to show signs of stress and bond yields fall.

Keith Lerner, chief market strategist at SunTrust Advisor Services, says equities are still attractive relative to bonds because stock dividends are richer. He said that “44% of S&P 500 stocks now have dividend yields above interest rate yields. This compares to just 26% a year ago and is among the highest levels during the bull market. (See graphic below):

Look forward
  • Monday: Manufacturing PMI data is due at 9:45 a.m. EST, followed by ISM manufacturing at 10 a.m.
  • Tuesday: Factory orders at 10 a.m.
  • Wednesday: The ADP private sector employment report will be released at 8:15 a.m. ISM services data will be released at 10 a.m.
  • Thursday: Unemployment insurance claims and international trade data at 8:30 a.m. A reading on productivity costs will also be released at the same time
  • Friday: Marks the most important economic data, with the non-farm payroll forecast for 8:30 a.m. A wholesale reading at 10 a.m. and a consumer credit report is due at 3 p.m.
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