Trade deals ease the pain, but normal remains elusive

Bank of America reports that global trade uncertainty remains significantly elevated, with its trackers still 1-2 standard deviations above pre-2018 levels despite recent agreements. This persistent unease, driven by vague deals and legal unpredictability, is acting as a material drag on capital spending and economic growth, potentially reducing business investment by nearly a full percentage point. The analysis suggests a 'new normal' of sustained volatility, prompting companies to hesitate on investments and impacting global GDP.

Analysis

According to Bank of America, global trade uncertainty remains a significant structural headwind for the global economy, establishing a 'new normal' of elevated volatility. While trade-uncertainty trackers have fallen from a peak of nine standard deviations above average, they persist at one to two standard deviations above the pre-2018 baseline. This sustained unease stems from recent trade deals that are vague and lightly enforced, alongside legal unpredictability such as a pending U.S. Supreme Court ruling on tariff authority. The economic impact is substantial, with BofA research indicating that prolonged uncertainty can reduce business investment by nearly a full percentage point within three quarters. This aligns with Federal Reserve estimates that a prior bout of trade tension cut global GDP by 0.8%. The issue is not isolated, as Canada, Mexico, and emerging markets like Brazil continue to exhibit elevated uncertainty, suggesting that corporate capital expenditure will likely remain suppressed as companies hesitate on long-term supply chain and production investments.

Key Decisions for Investors

• Given the persistent trade uncertainty and its material drag on corporate capex, investors should consider underweighting cyclical sectors highly sensitive to global trade and business investment.
• Scrutinize companies with complex global supply chains or significant exposure to emerging markets, as they are more vulnerable to the 'permanent unease' and potential flare-ups described in the analysis.
• Monitor key catalysts such as the U.S. Supreme Court's tariff ruling and shifts in trade-uncertainty indices, as these will be leading indicators for changes in corporate sentiment and potential market volatility.
• Favor companies with resilient, localized supply chains and strong domestic demand drivers, as they are better insulated from the global trade headwinds outlined by Bank of America.