As the U.S. and Beijing hammer out the details of a new trade agreement, investors will have to prepare for weeks of market volatility.
Analysts are predicting the greatest disruptions will be among stocks of those companies that would suffer the harshest blows of an all-out trade war. If China retaliates and pushes high tariffs on products sold by U.S. companies, big exporters will be greatly hurt.
Boeing Co. (BA, Financial), for example, is one of the companies most at risk because it is ships more than half of the products it manufactures overseas. The Seattle-based aerospace giant has already seen its stock drop by more than 9% in 30 days of trading. This morning, Boeing was up 2.7% to just over $328. However, by the lunch hour, its gain had diminished to 1.40%.
Boeing is not alone. In trading Friday, the world’s largest heavy equipment manufacturer Caterpillar Inc. (CAT, Financial) jumped 0.5% to $147.64 a share after a drop of more than 5% the day before. Industrial conglomerate United Technologies (UTX, Financial) was at almost $125 a share, up 0.69%, in early Friday trading. Later in the day, it was down 0.35%.
The stocks of the three companies, along with other industrial sector stocks, collectively lost as much as 5% in Thursday trading. Banking stocks also took a hit of around 3%.
On Thursday, President Trump announced $60 billion worth of tariffs on imports to the U.S. from China. The president has accused China of stealing intellectual property that have cost U.S. companies and workers billions of dollars. So far, in response to the president's announcement, China has announced $3 billion in tariffs on U.S. imports.
U.S. markets got torn up on Thursday. The S&P 500 closed down 2.5% at 2,643.71. The Dow Jones Industrial Average closed down 2.9% at 23,960.20. The Nasdaq was down 2.4% at 7,166.68.
To be or not to be
Nobody really knows whether we are headed for an all-out trade war. But investors may want to consider more than one scenario in a time of high emotion and rampant speculation.
The University of Pennsylvania’s Wharton School of Business drew up a series of estimates on the economic costs of a trade war. Its report estimates an all-out trade war would reduce Gross Domestic Product by 0.9% by 2027 and by 5.3% by 2040. The Penn Wharton Business Model also said wages would decline by 1.1% by 2027 and 4.8% by 2040, if there is an all-out trade war.
But there’s also the specter of a "trade opening," the report says. One potential of efforts to impose tariffs on imports could reduce existing tariffs against U.S. exports. Wharton calls this “a game of chicken” and surmises the outcome of the game “depends on the perceived value of trade to the U.S. and its trading partners."
Losing ground
In the last month of trading, stocks of companies that depend on large shipments overseas have posted significant losses.
Boeing fell by 10% in the last 30 days. Analysts say Boeing could lose as much as one-fourth of its value if there is a trade war.
Caterpillar lost 7%; United Technologies, 7%; General Electric (GE, Financial), 8%; Proctor & Gamble (PG, Financial), 5% and 3M (MMM, Financial), 5%.
