Trade wars, tariffs, and a slowing US economy could cause a stock-market ‘Trump slump’

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The escalating US-China trade war, threats of tariffs on all Mexican goods coming into the US, and a weakening economy has sent stocks sliding from their highs.
The market could see a "Trump slump" if agreements aren’t reached with China and Mexico, according to Ed Yardeni of Yardeni research.
If Trump does make deals with China and Mexico, the market would likely "jump for joy," Yardeni said.
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A "Trump slump" could start eating into the stock-market gains that investors have enjoyed since President Donald Trump was elected in November 2016.

The S&P 500 has gained 28% since Trump’s election — a phenomenon some have called the "Trump bump" — but the bulk of that return was achieved in 2017, when stocks jumped 20%. The market has gone virtually nowhere since then.

How much credit the president deserves for the stock market’s performance since his election is debatable. The roughly 10.5% annualized gain is in line with the index’s post-World War II average.

And the forces that boosted the market in 2017 have not carried over. Much of the driving force behind the bull market has been strong corporate earnings, aided by Trump’s policies that cut taxes and deregulated businesses. Yardeni added that the impact of those policies has since faded.

Last year, US stocks posted their worst annual performance in a decade, falling more than 6%.

"It’s been the Trump slump – the market has gone nowhere fast since," said Ed Yardeni, chief investment strategist at Yardeni Research, told Markets Insider.

The overall market is up 10% this year, but that could reverse. Last month, the S&P 500 fell nearly 7%, posting its worst May in seven years. A continued escalation of the trade war could lead to a bear market, Yardeni said.

"The market kept going up only to be hit in the face with Trump’s tariffs and an escalating trade war," Yardeni added, saying that the tariffs imposed on goods from China and Beijing’s retaliation have hurt farmers, automakers, and other consumer companies.

On Friday, global markets fell further after Trump threatened to levy tariffs against all US imports from Mexico unless the US’s southern neighbor slowed the number of migrants entering America.

That comes as the US economy has also shown signs of slowing, prompting concerns there’s a recession on the horizon. Weak retail sales, durable goods orders, and purchasing managers reports have darkened the outlook as of late.

Now, markets are more sure than ever the Federal Reserve will move to cut interest rates this year, going against the Fed’s expectation of a rate hike in 2020.

John Higgins, chief markets economist at Capital Economics, forecasts the S&P 500 will decline another 17% through the end of the year. However, he doesn’t expect a recession, just a "significant economic slowdown."

The market will be closely watching for signs that Trump’s deal-making will succeed or fail. If the United States doesn’t make deals the market likes, it’s likely that stocks will continue to fall, Yardeni said.

And while volatility will likely rock the markets through the summer, should Trump reach favorable agreements with both China and Mexico, then "all will be forgiven and the market will jump for joy," he added.

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