Trade war may prolong and deepen manufacturing downturn and hit stocks – Charles Schwab

Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab, points out that additional trade tariffs may prolong and deepen the global downturn in manufacturing, having negative consequences for stocks. So he suggests portfolios should have diversified across asset classes.

Key Quotes: 

“The global manufacturing purchasing managers index (PMI), derived from a survey of executives from 32 of the world’s top economies accounting for 85% of global GDP, is the most broadly used measure of world-wide manufacturing. As of last week, this index has now fallen for a record 15 months in a row – beginning its decline with the initial U.S.-China tariffs implemented at the end of March 2018”

“Why is manufacturing is so important to the economic and market cycle?  Earnings are the most important long-term driver of the stock market.  Corporate earnings tend to closely sync up with manufacturing cycles, with the PMI leading earnings by nine months.”

“With renewed trade tensions adding further pressure to manufacturing, an upturn may not be likely. In fact, the rate cut by the Federal Reserve last week, which came just before the President announced the new tariff, may have emboldened the U.S. administration to pursue a more aggressive trade policy.”

“A breakthrough in trade talks could eventually relieve trade tensions. However, in the near-term, there may be further downside to manufacturing, the outlook for earnings growth and stock prices, raising the risk that this mini-cycle turns into a broad recession. With global recession risks increasing, we suggest investors check their portfolios to make sure they are diversified across asset classes, as well as international versus domestic exposure.”