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Sept. 9, 2019, 9:42 a.m. EDT

How the trade war became the stock market’s biggest driver

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By Steve Goldstein, MarketWatch


Reuters
President Donald Trump speaks while meeting in April with Chinese Vice Premier Liu He in the Oval Office.

Trade policy has never been as uncertain as it currently is, and that uncertainty is leading to volatile stock markets, a new study finds.

The study, by the University of Chicago’s Steven Davis, was circulated by the National Bureau of Economic Research and dovetails with a recent Federal Reserve publication.

Davis examined rising policy uncertainty in the U.S. and global economies, drawing heavily on newspaper-based measures.

Trade policy has become both more uncertain and more protectionist under the Trump presidency, Davis writes, and it has “a capricious, back-and-forth character that amplifies uncertainty and undermines a rules-based trading order.”

Trade policy gets attention in 26% of newspaper stories about equity-market volatility /zigman2/quotes/210598281/delayed VIX +0.80% in leading U.S. newspapers from March to December 2018, compared to just 2.7% from 1985 to 2015. “In other words, trade policy went from a virtual nonfactor in U.S. equity-market volatility in recent decades to one of its leading sources in 2018,” he writes.

‘[T]rade policy went from a virtual nonfactor in U.S. equity-market volatility in recent decades to one of its leading sources in 2018.’

Steven Davis, University of Chicago

That uncertainty undermines the economy “by leading firms to delay or [forgo] investments and hiring, by slowing productivity-enhancing factor reallocation, and by depressing consumption expenditures.”

The Fed in late August published a paper quantifying the economic effects of trade policy uncertainty .

Uncertainty about trade policy in 2018 only may have lowered aggregate U.S. investment by more than 1%, the Fed said.

U.S. stocks over the last 52 weeks, despite the gyrations, have climbed — the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.09% is up 3% and the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.28% is up 4% over that time frame.

/zigman2/quotes/210598281/delayed
US : Cboe Indices
13.79
+0.11 +0.80%
Volume: 0.00
Oct. 17, 2019 3:14p
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
27,025.88
+23.90 +0.09%
Volume: 225.06M
Oct. 17, 2019 5:02p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
2,997.95
+8.26 +0.28%
Volume: 1.62B
Oct. 17, 2019 5:02p
loading...

Steve Goldstein is MarketWatch markets editor for Europe. Follow him on Twitter: @MKTWgoldstein.

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