The 2018–2019 U.S.-China trade war offered a clear lesson: markets react sharply to uncertainty. Even with stable earnings, valuation multiples can compress quickly when investor confidence fades. Today, evolving global trade policies and political agendas could bring similar volatility back into focus.
Lessons from the Last Trade War
During the U.S.-China tariff standoff, global equities fell sharply—down 11.2% in 2018, with the S&P 500 losing 6.2%. International markets fared worse, dropping 16.4%. Interestingly, these declines weren’t driven by earnings deterioration, but by waning investor confidence. Rising input costs and supply chain disruptions added pressure, but it was fear about future growth that hit valuations hardest.
The Federal Reserve’s tightening cycle—four rate hikes in 2018—amplified concerns. As economic strain became visible in early 2019, the Fed reversed course, pausing and eventually cutting rates.
Stagflation: The Key Risk
Tariffs present a unique economic threat: stagflation—a mix of slower growth and higher inflation. Tariffs raise business costs and disrupt trade, which can stifle investment and dampen economic activity. Central banks then face a dilemma: cut rates and risk fueling inflation, or raise them and risk worsening the slowdown.
Today, the backdrop is more complex. Inflation expectations are higher than they were in 2018, meaning businesses may raise prices faster, and consumers may feel the pinch more acutely—making inflation harder to control.
Why It Matters Now
Global equities are richly valued, with the MSCI World Index trading at 18.5x forward earnings—well above its long-term average. Credit spreads remain tight, signaling optimism. But this leaves little room for error. Renewed tariffs or trade tensions could trigger renewed volatility, especially if stagflation fears resurface.
Fixed Income: A Better Landscape
Unlike 2018, today’s bond market is more attractive. High-quality short- and intermediate-term bonds, like U.S. Treasuries and investment-grade corporates, now offer stronger yields—providing both income and potential downside protection. Still, credit markets bear watching. Tight spreads suggest complacency, and lower-rated bonds could face pressure if risk sentiment deteriorates.
Investment Strategy: Quality and Caution
Stay invested—but emphasize quality. In equities, focus on companies with:
- Strong cash flows
- Low debt
- Pricing power
- Reliable and/or growing dividends
In fixed income, favor high-quality, short-to-intermediate-term bonds for income, capital preservation, and flexibility. Long-term investors can ride out volatility, while tactical investors might consider reducing exposure to lower-rated credit.
Final Thoughts
Markets may appear calm, but that may reflect tariff fatigue more than true resilience. With elevated valuations, limited policy flexibility, and the potential for renewed trade tension, investors should remain alert, diversified, and lean into quality to navigate what could be a more volatile road ahead.
