Trump's trade war and US investors: a dangerous feedback loop

US President Donald Trump’s trade policy, along with a surprising synchronized global economy recovery, was a defining theme for much of 2017, propelling bulls to push the US stock market to new record highs on what felt like a daily basis. Threats of protectionism were all talk, the conventional wisdom went, but with deregulation and tax cuts the US president meant business.

And then the tariffs came. The first round of Trump’s dramatic show of protectionism came in March with a televised announcement from the Oval Office that steep tariffs would be slapped on steel and aluminum from just about everywhere. US stocks rose on the news, presumably in relief that the administration granted exceptions and there would be room for negotiating.

The Dow Jones Industrial Average fell in the weeks following the metals announcement, but has largely remained flat since then. In fact, after falling in the first quarter, US stocks have risen in the second quarter, with gains fairly broad-based across sectors.

In day-to-day trading, US stocks have been resilient to increasingly belligerent trade policy from the White House, which has since slapped metals tariffs on the allies who were previously granted exemptions and is set to impose import taxes on more than US$30 billion in Chinese imports less than two days from now.

Stocks fell in light trading on Tuesday ahead of a day off for the Fourth of July holiday, but that followed three straight days of gains, despite no sign that the US and China have made any progress in negotiating a resolution to the trade fight. The tariffs are coming.

Investors, it seems, are still waiting for even bigger bombs to drop before they believe that Trump will be willing to risk slowing strong economic growth with an all-out trade war.

Meanwhile, Trump appears

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