It’s no misprint.
The number really is $5 trillion.
That’s the total stock market value U.S. investors have forfeited because of President Trump’s trade war with China (and now Mexico).
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The number was conjured by Deutsche Bank analysts based on their projections for economic growth and stock market returns.
Trump’s trade war has been the primary reason global economic growth remains muted. Slower growth, in turn, has kept U.S. stocks range-bound because of investor expectations for lower earnings growth.
Deutsche Bank estimates that U.S. stocks would be trading 12.5% higher today had Trump not instigated his trade war 17 months ago. The forfeit value totals $5 trillion.
I’ll concede that the Deutsche Bank assertion is impossible to prove. That doesn’t mean it’s implausible.
The prospect of slower earnings growth since Trump’s trade war began in January 2018 has translated into a lower price-to-earnings (P/E) multiple.
Investors were willing to pay 23 times S&P 500 earnings before the trade war began. They’re willing to pay only 18 times those earnings today.
S&P 500 P/E Multiple
Without the trade war and the downward adjustment to economic growth and earnings expectations, the S&P 500 would certainly be trading at a higher P/E multiple.
Trump has turned to the Federal Reserve to mitigate the trade-war damage. He has implored the Fed to lower interest rates to stimulate economic growth.
Trump could soon see his wishes fulfilled.
James Bullard, president of the St. Louis Fed, said on Monday that the United States “faces an economy that is expected to grow more slowly going forward, with some risk that the slowdown could be sharper than expected due to ongoing global trade regime uncertainty.”
Bullard said a rate cut (or many cuts) could help stabilize the economy. It could help ensure the current 10-year-old economic expansion is extended.
Stocks responded to the news by regaining some of that lost $5 trillion on Tuesday. Prices rose across the board.
Good news for stock investors, not necessarily good news for income investors.
Should the Fed follow through with interest-rate cuts, meaningful income from low-risk, fixed-income investments (bonds, CDs, savings accounts, money-market instruments) will remain as elusive as the ability to change Trump’s mind on trade.
Income investors have turned to stocks for income since the Fed instituted its low-interest-rate policy 10 years ago.
Unfortunately, meaningful income from that source could become elusive.
The dividend yield on the S&P 500 is already down to 1.8%. That yield will only fall if stock prices continue to rally.
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