The threat of a full-blown U.S.-China trade war is having less impact on both investor sentiment and stock prices than might be expected, judging by double-digit gains for the Nasdaq and modest but positive returns for the S&P 500 so far this year.
To a large degree, the prospect of a wider trade conflict hasn’t been enough to untrack the market leaders that lifted Wall Street throughout the first half of 2018 — albeit with higher volatility.
Large-capitalization technology and internet stocks continue to hit new records. Meanwhile small-cap stocks, a group that is reliant on the domestic economy and is somewhat insulated from trade woes, rallied to all-time highs in the past week.
Read: Here’s the only worry about the big rally by small-cap stocks
The Nasdaq Composite COMP, -0.26% despite a modest weekly decline is trading near record levels set the previous week and is up about 12% since the start of the year, after a nearly 30% gain in 2017. The small-cap Russell 2000 index RUT, -0.20% is up about 10% since the start of the year, adding to a 14% gain last year.
Meanwhile, the large-cap S&P 500 SPX, +0.19% SPX, +0.19% — the U.S. stock benchmark — is up 3% over the past six months, leaving it 4% below the record set in late January.
The market’s inability to gain what some analysts have termed “escape velocity” is largely due to trade-related headlines. In addition to the battle with China, President Donald Trump on Friday tweeted that he’s considering 20% tariffs on imports of European autos.
Check out: Trade-war tracker: Here are the new levies, imposed and threatened
Stock-market bulls said it isn’t surprising to see the broader market lagging after a short-term shock.
“Just like a heart attack patient doesn’t get right up off the gurney and run the 100-yard dash, the stock market is likely going to have to convalesce for a few sessions without much further downside,” said Jeffrey Saut, chief investment strategist at Raymond James in a Friday note.
The Dow on Friday snapped an eight-day losing streak, its longest since March 2017, but ended the week with a 2% decline, while the S&P 500 saw a 0.9% weekly decline and the Nasdaq fell 0.7%. Despite the weekly drop, the trade issue hasn’t soured investors on stocks.
According to the American Association of Individual Investors sentiment survey, 38.7% of those polled describe themselves as bullish on the market, meaning they expect prices to be higher in six months.
This is down 6.1 percentage points from the previous week, but it remains roughly even with the historical average, of 38.5%. And while the ratio of bearish investors rose 4.5 percentage points, only 26.2% of investors describe themselves that way, below the historic average of 30.5%.
There are good reasons for equity investors to be upbeat — earnings are up by double-digits and the underlying economy is expanding at a healthy clip thanks to a tailwind from the tax cuts signed into law late last year. Such an environment should support prices for the rest of the year, according to Emily Roland, head of capital markets research at John Hancock Investments.
Trade tensions, however, continue to dominate headlines. And the threat of a wider trade war hasn’t escaped the attention of central bankers, several of whom, including the Federal Reserve Chairman Jerome Powell and the European Central Bank President Mario Draghi, on Wednesday warned that a trade war could push the global economy into a ditch.
See: Why a major trade war could mean a ‘full-blown recession’
While the concerns weighed on Wall Street, it hasn’t yet proved the bull-market killer that some fear.
Even the Dow’s DJIA, +0.49% eight-day slump was very relatively mild—only about 3% from peak to trough.
According to LPL Research senior market strategist Ryan Detrick, the fact that the Dow remained above its 200-day moving average amid a long slump is a good sign for the bulls as the index tends to bounce back over the following three months 80% of the time in these scenarios.
Next week’s economic releases aren’t likely to move the market, though they are likely to reinforce the existing picture of the healthy economy.
On Monday, consumer confidence and housing index data are due for release. On Tuesday, investors will get durable goods orders and data on trade and pending home sales. Personal income, as well as Chicago PMI and consumer sentiment data are due on Friday.
Investors will also hear from a number of Fed officials, with Atlanta Fed President Raphael Bostic and Dallas Fed President Rob Kaplan speaking at separate events on Monday. On Wednesday, Randal Quarles, Fed vice chairman for bank supervision, delivers a speech on international bank regulation at an event in Sun Valley, Idaho, while Boston Fed President Eric Rosengren speaks at an event in Washington, D.C. On Thursday, St. Louis Fed President James Bullard participates in a moderated conversation on the economy and monetary policy.