Growth Stocks Are on the Firing Line in the Trade War

Investors in U.S. growth stocks have been richly rewarded in recent years, but their fortunes are set to turn if President Donald Trump can’t resolve his trade disputes. 

Bloomberg News reported on Wednesday that China and the U.S. had wrapped up three days of trade talks and “expressed optimism that progress had been made.” For Trump, that’s a clear departure from his usual tough talk on trade.

That shouldn’t be surprising. As I pointed out recently, the president fancies himself a champion of American business and gauges his success by the level of the stock market. The market’s steep drop in December signaledthat the country’s biggest companies, which dominate market barometers such as the Dow Jones Industrial Average and the S&P 500 Index, are under increasing stress. They generate much of their revenue overseas, so Trump’s trade disputes are an obvious concern.

If the president was hesitant to connect those dots, Kevin Hassett, chairman of the White House Council of Economic Advisers, was not. He told CNN last week that “There are a heck of a lot of U.S. companies that have sales in China that are going to be watching their earnings being downgraded next year until we get a deal with China.” That was a day after Apple Inc. cut its revenue outlook, blaming in part weaker demand in China.

But Trump’s trade policies don’t affect all companies equally. Growth companies, or those that are expected to grow faster than average, sell more of their products overseas than slower-growth value companies. That means they have more to gain from free trade and, of course, more to lose during a trade war.

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Value Versus Growth Plays Out in Emerging Markets

Emerging markets are flashing warning signs, but don’t tell that to value stocks.

The MSCI Emerging Markets Index is down 19.2 percent from its recent high on Jan. 26 through Friday as investors wring their hands over tariffs, slow growth, a rising dollar and numerous other fears.

To some investors’ surprise, value stocks are holding up better than growth. The MSCI Emerging Markets Value Index is down 18.3 percent, while the MSCI Emerging Markets Growth Index is down 20.1 percent.

In theory, that’s not supposed to happen. Value stocks, after all, are cheaper than growth for a reason: They represent companies, and sometimes whole sectors, that have fallen on hard times or are struggling to grow — think banks and brick-and-mortar retailers. Those problems are compounded in a downturn. And as goes the business, so goes the stock.

But in reality, stocks haven’t always followed that playbook, at least in the U.S. I counted 13 U.S. bear markets since 1926, as defined by a decline of 20 percent or more in the S&P 500 Index for the longest period for which numbers are available. I’m also counting the periods from September 1929 to March 1935 and from March 1937 to April 1942 as a total of two bear markets.

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