Bewitched, Bothered and Bewildered was the name of a popular 1940’s Broadway song. It might also describe the mood on Wall Street following heightened trade uncertainty.

Bewitched – Trade policy has dominated financial news since U.S. steel tariffs were announced on March 8th.  Now there is concern over a full blown trade war following this month’s tariffs on $34 billion of Chinese goods (see top chart).  Bothered – A recent survey by Strategas Research showed that trade policy is the top concern among institutional investors by a 2-to-1 margin. Bewildered – Few investors today have dealt with rising trade tensions.  Perhaps the most recent significant episode was the 1973 OPEC oil embargo.

One consequence of trade worries is that economically sensitive investments like emerging market equities have struggled in recent months, while sectors like U.S. Growth stocks that are able to grow independently of the economy, have outperformed. While this trend could continue, we would caution against piling on at present valuations (see bottom chart).

We continue to believe that world leaders will not wittingly escalate trade tensions to the point of causing lasting damage to the economy and stocks.  Even so, we are heedful that the situation could unfold in an unexpected and adverse way.