A Trend Too Strong to Ignore?
Various periods in history have been marked by fears of trade wars.  Indeed, the cover of Time magazine on October 7, 1985 depicts Uncle Sam with arms outstretched as if to stop free trade dead in its tracks, amidst the caption, “Trade Wars.” However, before and since that period, and for much of history, tariffs have declined as the world becomes more interconnected.

  • As the chart above shows, duties collected as a percentage of imports declined from 4% in 1987 to under 2% in 2017, which indicates that global governments tend to favor free trade.

  • Yet there is likely to be more pain before mutually agreeable settlements can be made.  As the fear of rising tariffs increases, investors may want to look to areas of the stock market that may be more insulated.  Small cap stocks, for example, have outperformed large cap stocks by several hundred basis points this year, likely due to their more domestic focus (the Russell 2000 derives only 21% of its revenue from outside of the U.S. while the S&P 500’s proportion is nearly double at 39%).

  • In addition, certain industries may be less susceptible to trade issues than others.  U.S. internet stocks have already been largely shut out of markets such as China and may thus be less affected by trade issues, while foreign governments may be more likely to target agriculture companies. This may create an attractive opportunity for active managers who can carefully select investments among the winners and losers. 

The views expressed are the views of Fred Alger Management, Inc. as of August 2018. These views are subject to change at any time and they do not guarantee the future performance of the markets, any security or any funds managed by Fred Alger Management, Inc. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.

Risk Disclosure: Investing in the stock market involves gains and losses and may not be suitable for all investors. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Many technology companies have limited operating histories and prices of these companies' securities have historically been more volatile than other securities, especially over the short term. Technology companies may also face increased competition, government regulation, and risk of obsolescence due to progress in technological developments. 

Fred Alger & Company, Incorporated 360 Park Avenue South, New York, NY 10010 / www.alger.com