One of the supposedly biggest risks facing the U.S. stock market has so far proven a nonfactor, with equity benchmarks levitating near record levels despite rising tensions on trade policy.
For months, investors have said that the prospect of a trade war between the U.S. and other major economies was the most severe threat facing Wall Street. However, even as this issue has shown signs of escalating, with President Donald Trump announcing $200 billion tariffs against China on Monday and the country swiftly retaliating, fear has yet to really show up in the market.
Despite the apparent rise in tensions, investors have repeatedly ignored off the issue, choosing instead to focus on strong economic data and rising corporate profits, two factors that have helped power major indexes higher.
According to the latest monthly survey of fund managers by Bank of America Merrill Lynch, a net 69% of those polled said the U.S. is the most favorable region when it comes to earnings expectations, a record level in the 17-year history of the survey.
Market participants still say that the trade issue could escalate into something more severe — resulting in steep losses for stocks, as has already been seen in emerging markets— but the issue seems to be losing its potency. According to the fund-manager survey, 43% of those polled said that a trade war was the biggest “tail risk” facing markets. No other issue was named as often, but even this represents something of an easing of concern. In the previous month’s survey, roughly 55% of respondents said it was the biggest risk.
Read more: Investors load up on U.S. stocks while growing cautious about the rest of the world, survey shows
The current view toward the trade issue can be summed up by Voya Investment Management, which responded to the latest developments with a report entitled “another day, another tariff.”
The report read, “The Chinese trade issue has been hanging over the market for quite some time and the market has become adept at shrugging it off. While some industries and companies are feeling the impact, the overall implications to the global economy have been minimal.”
It added, “The uncertainty is certainly a negative for businesses and planning. But the robust U.S. economy and record high corporate earnings continue to provide markets with the gas to move higher.”
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The S&P 500 SPX, +0.54% has gained 8.6% thus far this year, bringing it within 0.5% of record levels. The Dow DJIA, +0.71% has gained 6.2% and the Nasdaq COMP, +0.76% has climbed more than 15% in 2018.
In a sign of how investors are looking past the trade issue, volatility VIX, -3.36% in the stock market has been atypically low of late. According to data from Bespoke Investment Group, the average absolute daily change for the S&P 500 has been 0.4% (in either direction) over the past 50 trading days. In just September, the index has averaged a daily move of less than 0.24%. Both are notably less than the 0.7% average seen throughout the bull market.
Learn more: What trade fears? U.S. stock investors are extremely calm
According to BlackRock’s global risk indicator, global geopolitical risk has dropped over the past month, falling beneath its historical average, “indicating the market’s attention to geopolitical risks overall has eased up.”
The indicator had been generally trending higher since Trump’s election in November 2016, seeing particular spikes around tensions with North Korea and the inaugural tariff salvos. However, it is currently at its lowest level in more than a year, a decline that coincides with repeated examples of Wall Street rising despite new tariff rhetoric.
BlackRock’s indicator is calculated by tracking the mention of terms associated with political risk in analyst reports, news stories, and some social media. It aims to gauge the market’s attention to a particular issue, as opposed to the public’s, the investment bank wrote in a note.
The overall indicator is compiled by looking at 10 different issues that could have an impact on the market, including cyber attacks, tensions between Russia and NATO, and “European fragmentation.” The score is calculated by analyzing the relative likelihood of a market-relevant event occurring with the subject, as well as how big of an impact that could have on global equity prices.
In the latest month, three issues were seen as having a higher likelihood of a major event: an issue related to populism in Latin America, a conflict with North Korea, and the relationship between the U.S. and China. However, all three of those were offset by a drop in global trade tensions.
While the rise in China-U.S. tension is due to trade-policy frictions, the risk from global trade tensions overall fell “due to reduced tensions between the U.S. and its traditional allies,” BlackRock wrote in a report.
The investment bank’s trade-tension indicator does imply a higher amount of risk than usual — as has been the case consistently since Trump’s election — but it is down from two peaks hit earlier this year.
Tensions between the U.S. and China, on the other hand, are slightly below a peak hit earlier this year. In turn, that peak was near a record level hit in late 2011. The data go back to 2005.
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