When a trade war broke out between the world’s two largest economies in June, investors barely blinked. After the Federal Reserve raised interest rates — often a reason for investors to sell stocks — the markets continued to climb. As some of the world’s largest economies began to slow down, American markets largely shrugged it off.
Last week, elements of all of those combined to drive the S&P 500-stock index down by 4.6 percent, its worst weekly drop since March and one marked by stomach-churning price swings. Stocks are now down 1.5 percent this year.
More volatility could be in store, as investors assess the allegations by prosecutors that President Trump sought to secretly do business in Russia and directed illegal payments to ward off a potential sex scandal during his 2016 campaign for the White House.
The arrest of a prominent Chinese technology executive, meanwhile, has added new strains to the relationship between Washington and Beijing, which face a March deadline to reach a trade deal. On Sunday, China summoned the American ambassador in Beijing to protest the arrest, while Robert Lighthizer, who is leading the talks with China, said he considered March 1 to be a “a hard deadline” for the trade negotiations.
“Every eye is going to be focused on every piece of commentary on this trade deal,” said Rick Rieder, chief investment officer of global fixed income at BlackRock, which manages more than $6 trillion in assets. “Because the impact on growth is so significant.”
While the large market swings on trade-related news underscore some investors’ view that a resolution to the impasse between the United States and China will be crucial to the survival of the economic expansion, there are other political and economic risks as well. They range from the ongoing fallout from the special counsel’s investigation of Russian interference in the 2016 presidential election, to the relentless staff churn in the Trump administration, to efforts to negotiate Britain’s withdrawal from the European Union, to social unrest in France.
“The fact is that politics is driving the economy to an extent that is very atypical,” said Julian Emanuel, chief equity and derivatives strategist at BTIG, an institutional brokerage firm. “We would say probably to the greatest extent that we’ve seen in our investing lifetime.”
Last week, markets whipsawed wildly on headlines related to the trade war. On Monday, stocks jumped 1.1 percent on word that President Trump and President Xi Jinping of China had agreed to the 90-day halt on any new tariffs to provide space to negotiate key trade issues.
The next day, the S&P dove 3.2 percent, as the president, calling himself “a Tariff Man” in a Twitter message, seemed to reignite the standoff.
Markets were closed on Wednesday to mark the death of former President George H.W. Bush, but as soon as trading resumed on Thursday, stocks dropped as much as 2.9 percent after news that Meng Wanzhou, the chief financial officer of the Chinese electronics giant Huawei and the elder daughter of its founder, had been detained in Canada at the request of the United States. Then, late in the day, the markets recovered most of those losses on hopes that the Federal Reserve could slow its plan to raise interest rates next year. But they still ended the day lower.
The trade war has already taken a toll on large chunks of the global economy. China, the world’s second largest economy, is growing at its slowest rate in nearly a decade. The export-driven economies of Japan and Germany — the third and fourth biggest economies in the world, respectively — both contracted in the third quarter.
The United States has so far been an outlier. Thanks in part to a burst of deficit-fueled stimulus, a large chunk from the tax cut, the American economy this year is on track to grow at its fastest pace since 2005. The national unemployment rate is 3.7 percent, a near 50-year low. Corporate profits and wages are growing at their fastest pace in years.
For much of 2018, results like that helped Wall Street stand out even as major stock benchmarks around the globe tumbled. Chinese stocks are down more than 20 percent, and shares in Germany are down 16.5 percent. In Japan, stocks are down about 5 percent, and in Britain they’re down more than 10 percent.
But even in the United States, there are emerging pockets of weakness, particularly in parts of the economy that are sensitive to rising borrowing costs. Pending home sales have declined for eight straight months, as interest rates on 30-year fixed mortgages have climbed. Monthly auto sales have plateaued, prompting job cuts at General Motors and Ford.
The stock market has mirrored those concerns since the summer. Shares of carmakers and auto-parts manufacturers are down more than 25 percent this year. Shares of homebuilders have slumped nearly 30 percent.
And investors are growing more concerned about the outlook for corporate profits next year, despite third-quarter results that showed that profits at S&P 500 companies rose at the fastest pace since 2010. Instead of the strong results, investors zeroed in on commentary from executives about whether next year might mark the beginning of the end for the second-longest business cycle expansion on record.
“We’re very mindful once again where we’re at in the cycle, Gregory Carmichael, chief executive of the Cincinnati-based lender Fifth Third said at a conference last week. “We’re well-positioned to deal with the downturn in the economy, and we’ll be very cautious.”
That very caution from corporate America could itself have an impact on the economy — should lenders pull back financing, or large businesses slow their growth plans.
There are other risks to the economy, too, and high on many investors’ lists of these is the Federal Reserve. The central bank has been raising interest rates and pulling back on other financial crisis-era stimulus that helped drive a global investment boom over the past decade. These higher rates pinch stock investors by making government debt a more appealing alternative, particularly in uncertain times, and also mean companies that binged on low-cost loans will have to spend more to cover their obligations.
Many analysts date the start of October’s brutal sell-off for stocks — they dropped 6.9 percent — on comments from the Fed’s chairman, Jerome H. Powell, in early October that seemed to indicate that the Fed planned to raise rates more aggressively than the market had expected. In late November, though, Mr. Powell sent stocks surging when he said the Fed’s benchmark interest rate was “just below” the neutral level. The markets took those remarks as a sign that the central bank might not be as aggressive in raising rates as they initially thought.
The market tumult, coupled with the increasingly uncertain path for the global economy, is part of the reason Mr. Rieder, of BlackRock, said he believed that the Fed might decide not to lift interest rates at its next meeting on Dec. 18-19.
“The Fed should slow down and now take a step back and look at what has happened,” he said.