Who’s Winning the Trade War?

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If we are, in fact, in a trade war – then who’s winning? Is it the U.S.? China? Perhaps the smaller countries that don’t appear in the headlines each day?

From my perspective, there are two ways to answer this question. The first is by looking at what’s happening with stock prices around the world; the second is by looking at actual economic fundamentals. Let’s begin with stock prices.

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One of the key tenets of Dow Theory is that the stock market discounts everything. As investors make their buy/sell decisions, they are factoring in every piece of information known and available to them. When billions of investors around the world do this collectively, it’s fair to say that an awful lot of information is being priced in.

But as we know, markets are not perfect, quite simply because people are not perfect. The number and variety of documented behavioral biases that impact our everyday decision making is enormous, and when you layer on things like group think and algos, it can cause markets to behave erratically.

However, that is typically the exception and not the rule. By looking at longer-term price action, we can generally get a good feel for what’s happening behind the scenes, because much of the underlying economic information filters its way into financial markets.

The chart below provides us with our first indication as to who’s “ahead” in this war of commerce.

international markets

This chart shows the year-to-date performance of major international markets, and as you can see, there is a clear line in the sand at 0%. So far during 2018, the U.S. is the only market of those listed that has increased in value. What does that mean?

If we look at this pragmatically, it means the U.S. is the only country where the expected future earnings streams for corporations is rising … After all, that’s what a share of stock represents, and the only reason a share of stock will rise in value.

Based on this alone, it’s fair to say that the collective investment community believes the U.S. has the upper hand. This makes sense, especially when we consider that the U.S. is more insulated from global trade than most other countries, due to the fact that we buy a ton of goods and services from ourselves.

It’s also interesting to note that the two worst performing markets in the above chart (China and Germany) are both heavily export-reliant. As such, this price action seems to pass the common sense test.

Of course, many more things than just trade war prospects impact stock prices, so we can’t definitively conclude that the U.S is “winning” the trade war. As an example, the outlook for the U.S. could be viewed as more favorable simply as a result of the recently passed fiscal stimulus measures.

But either way, as voted on by billions of investors using trillions of units of currency, the U.S. seems to be in first place. Now let’s see if actual economic fundamentals reveal the same story …

Since each country’s respective economy is so multifaceted and difficult to analyze, one of the best ways we can get a feel for how an economy is doing is to look at changes in leading economic indicators (LEIs). For this, we’ll use data from The Conference Board.

In the table below, we can see the latest changes in LEIs for major developed countries. Of particular note is that the Global LEI increased 0.7%, the U.S. LEI increased 0.5%, China’s LEI increased 0.8%, and the Euro Area’s LEI increased 0.3%.

leading economic indicators

Unlike the price data we looked at previously, the data that goes into these LEI figures is primarily objective (as opposed to subjective). While some of the data is survey oriented, most of it is comprised of actual economic data. Therefore, this information should – at least in theory – provide a relatively good indication of the actual status of each respective economy.

The big takeaway (at least my takeaway) is that most economies are still holding up just fine. Each of the major players/areas is seeing improvement in their LEIs, with the exception of Brazil, Japan, Mexico and Spain, which saw declines, and Germany and the U.K., which were flat.

Since month-over-month data often contains a lot of noise, let’s drill into the LEIs for some of the key players involved in the trade war.

Up first is the U.S., and we can see below that the LEI has reaccelerated. It was up 0.5% in June, after being unchanged in May and rising 0.4% in April. No need for panic here.

conference board leading economic index

What about China? Is the recent 0.8% increase in its LEI masking longer term issues? Nope. As you can see below, China’s LEI may have decelerated slightly, but it remains in a clear uptrend, which signals continued economic growth.

lei cei china

Now for the Euro Area. While Germany’s LEI was flat last month and is actually well off its recent highs, the LEI for the Euro Area as a whole remains healthy. It increased 0.3% in June and has been steadily moving higher for the last couple of years.

long-term lei cei

This suggests that while some of the export-dependent countries in the Euro Area may be struggling a bit, the group as a whole is doing just fine.

Circling back to our original question, is it possible to tell from this data who is “winning” the trade war? Well … yes and no. While we can say somewhat definitely that some countries such as Germany are NOT winning the trade war, it’s difficult to draw specific conclusions from one-month changes in LEIs.

More importantly, I would say that this data shows that the ongoing trade dispute has had little overall effect in terms of sinking the global economy. While news headlines bombard us every hour of the day with developments in the trade saga and “who said what,” most economies around the world are still chugging along just fine.

This could change if and when the trade disputes become more serious, but so far I would suggest that most of what we’ve seen has been for show, with little damage actually being enacted on various economies. Or, said differently, economic growth across much of the world is strong enough that it is effectively masking the impact of trade measures taken so far.

The preceding content was an excerpt from Dow Theory Letters. To receive their daily updates and research, click here to subscribe. Matt is also the Chief Investment Strategist at Model Investing. For more information about algorithmic based portfolio management, click here.

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