US stocks have continued to outperform the rest of the world as US markets appear to have more or less come to terms with President Trump’s aggressive trade agenda. But the head of the largest investment firm in the US doesn’t expect this aura of invincibility to last much longer if Trump launches the next round of trade war with China.
During an interview with Bloomberg published shortly after the company released its Q2 earnings, BlackRock CEO Larry Fink said US stocks could drop between 10% and 15% if the Trump administration moves ahead with tariffs on another $200 billion of Chinese imports. While US investors have eagerly bought every trade related dip so far, Fink said the fallout from a worsening trade war could harm the US economy, which has outperformed its biggest rivals as the “global synchronous recovery” narrative has all but collapsed.
Still, while conditions in the market have certainly grown “more uncertain,” Fink said, it’s also possible that concerns about growth are overblown and that US stocks could continue powering higher.
FINK: “The question I’m raising is ‘is this 1994?’ when the markets were very concerned about growth and the Fed eased when it should have tightened and then we had a five year bull market. The market might be wrong right now, the economy could continue to grow, the trade problem isn’t that difficult…if that’s the case we’ll wake up a year from now and markets will be up,” Fink said.
At the same time, there’s the possibility that the burgeoning US-China trade war could sink stocks and growth.
FINK: “The market’s having a hard time digesting the whole change in globalization and trade…the foundations of international trade are being raised and being questioned.”
Trade fears have already prompted some investors to hit “pause,” even as deal-making continues at a record pace and corporations have continued propping up their shares. Stocks are also threatened by the fact that investors can earn a return simply from holding cash for the first time in a decade.
Asked why he doesn’t believe we’re already in a trade war, Fink responded that the tensions between China and the US could be better described as a “trade spat” or a “trade skirmish” because the anticipated impact on global GDP is still relatively minor.
INTERVIEWER: “You don’t consider this a tariff war?”
FINK: “It’s a minor trade war…We’ll see what happens with the next $200 billion proposal that the US has done with China. Right now it’s talk. Let’s see if there’s a resolution on that.”
Fink is already seeing the first signs of investor skittishness, as BlackRock reported Monday that investors pulled $22.4 billion from BlackRock’s equity products during the second quarter. Inflows into those same products totaled $17.8 billion. Meanwhile, the company’s total AUM as of June 30 was $6.3 trillion, with a total net inflow of $20 billion during the quarter.
Fink’s not the only investor worried about the possible impact of the trade war on the US economy. As Guggenheim’s Scott Minerd recently pointed out, the “consequences” of the global trade war are already showing up as the US economy prepares to enter the “ninth inning”…
… and if a sudden spike in inflation prompts the Fed to raise interest rates more quickly, the central bank could shock the economy by effectively pulling the brakes on lending and credit at the worst possible time. The economic fallout could confirm traders’ fears that the next Fed rate cut could come as soon as 2020, if not sooner.
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