Study: what happens next to the stock market after trade war news


Trump has gone nuclear with his trade war. He plans to impose tariffs on $200 billion more of Chinese exports to the U.S.. If China hits back, Trump will impose tariffs on another $200 billion.
China currently exports $478 billion to the U.S. and imports $169 billion from the U.S.. Trump is playing a numbers game: if he hikes tariffs to a total of $450 billion, it will pretty much involve every single Chinese export to the U.S.
But more importantly, China doesn’t export enough goods to the U.S.. They can’t match the U.S.’ tariffs dollar-for-dollar.

Of course China could try to hit the U.S. in other ways, but the reality is that China’s options are limited. The U.S. has the upper hand in a trade dispute because it is a massive net importer.
I compiled a timeline of trade war related news from these 2 sources (here and here). People commonly assume that trade war related news is bad for the stock market. Is it? Let’s take a look at the data.
Here are the S&P 500’s forward returns after a Trump trade war related piece of news came out. See any pattern?

Click here to download the data in Excel.
Trade war news do seem to be a short term bearish factor for the stock market. The stock market tends to go down on a 3 day to 1 week time frame.
But the stock market tends to go back to normal after 1 week. The forward returns after 1 week no longer have a bearish bias.

Conclusion

Today’s trade war related piece of news is probably a short term bearish factor for the stock market. But it isn’t a consistently medium term bearish factor for the stock market.
This supports our other recent short term bearish studies for the stock market.
Read more market studies here

2 comments add yours

  1. A viable option for china to is to dump treasuries which they have already started to do. Any implications in the overall stock mkt as probably bond mkt will tank if china treasuries sales pick up speed.
    Thks for your thoughts.

    • Yes, that is a possibility. China owns around 6-7% of U.S. Treasuries.

Leave a Comment