The intensifying trade talk between America and the EU and China have been the number one cause of market volatility this year. 9 out of the first 9 S&P 500 firms reporting earnings in Q2 beat estimates, but that’s irrelevant to the market when there is the potential for a trade war. The Charles Schwab chart below shows how the Russell 2000, which includes small caps that are domestically focused, has outperformed the Dow which includes multinational firms with many industrials.
Source: Schwab Research
The domestic firms benefit from the strong dollar and can be helped by the protectionism which reduces the threat of foreign competition. The Dow Jones and S&P 500 are hurt by the strong dollar and tariffs since companies part of these indexes are multinationals that convert foreign profits into US dollars and benefit from trade. It’s possible that without these heated trade talks and with a lower dollar that the S&P 500 and Dow would be up almost as much as the Russell 2000 is now. As of the June 26th close, the Russell 2000 was up 8.66% year to date, while the S&P 500 was up 1.85% and the Dow was down 1.76% year to date.
Impact Of Latest News
The Wall Street Journal reported on Sunday that the Trump administration would propose to block any companies which have a 25% Chinese ownership or greater from investing or buying US firms with “industrial significant technology.” The negotiations between the US and China are unique because America’s largest deficit is with China, China has strategic importance in the North Korea geopolitical issue, and China is the country most associated with purportedly stealing American intellectual property. Since Trump wants a lower trade deficit and secure intellectual property, he’s definitely pushing the boundaries further with China than he is with other countries. Since he is demanding more from China than China is from America, you can say this is an advantage for him if you assume compromises meet in the middle.
