Regardless of who wins the White House race, the U.S.’s global trade outlook has been upended for years to come.
That’s a problematic conclusion for investors hoping for a sustained stock market comeback after almost 3 months of stalled progress, topped by volatility.
But it’s a difficult to avoid one after prospects for the Trans-Pacific Partnership (TPP) turned dicey during campaigning.
Having initially backed the 12-nation agreement, Hillary Clinton withdrew support in October 2015, whilst still Secretary of State.
She said she was worried the agreement would not do enough to curb ‘currency manipulation’ or protect consumers from excessively high drug prices.
At the time, the shift was widely read as an attempt to shore up support among labour groups and liberal Democrats who sided with her rival for the party’s nomination, Bernie Sanders.
Of course, Clinton’s change of heart also edged her on to political ground occupied by another long-standing critic of the deal, Donald Trump.
Either way, the proposed TPP deal, which aims to liberalize commerce in 40% of the world’s economy— notably excluding China— now, has a much lower chance of being ratified.
All 12 signatories must stamp the deal before February 2018, or it will face higher and more complex ratification conditions.
At worst, a new U.S. protectionism may be abroad.
It’s too early to know how much impact this might have on a U.S. trade deficit which widened for 9 out of the last 15 months.
But in conjunction with a trade-weighted dollar that is some 30% higher over five years, according to Federal Reserve data, added impediments to trade are another worry for investors.
Such concerns would be crystallised under a Clinton administration that tries to appease left-wing Dems and right-wing Republicans with an increasingly protectionist stance.
As for Trump, his TPP views are at least clearer than Clinton’s.
However, hopes that the houses of congress will exert their typical restraining influence on a Trump administration are balanced by the largest GOP prevalence in The Capitol for decades.
Overall, we think these concerns are already visible on shares that are sensitive to a protectionist turn in U.S. trade policy.
A basket of shares from industries that could be negatively impacted has visibly underperformed the broader S&P 500 since last October.
Based on a mix of quantitative and anecdotal factors, our TRADE basket comprises large-to-mid-cap names in ‘global trade’, outsourcing and major importing sectors.
Although it was not possible to create a perfectly re-based time series using Thomson Reuters Eikon, a composite index of the group of 24 shares shows it has lagged a similarly re-indexed S&P 500 for most of the year.
Worth about $1.7 trillion of the S&P 500’s $19 trillion capitalisation, this politically-sensitive constituency could exert a sizeable drag on the overall market.
DAILY CHART: S&P 500 VS. ‘TRADE’ BASKET (INDEXED PRICE PERFORMANCE SERIES)
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