Aren't Trade Wars Bad? Wall Street Doesn’t Think So

The S&P 500 Index rose to its highest since mid-March on Monday, which is pretty remarkable considering all the headlines warning of a burgeoning global trade war, with even the U.S.'s closest allies threatening retaliatory measures unless President Donald Trump reverses course.

Most pundits pointed to optimism for economic growth as the reason behind the resilience in stocks, despite the trade alarms. But that analysis feels less than satisfying, mainly because economists generally agree that a trade war — or even a skirmish — is at best misguided and at worst risks pushing the economy into a period of slow growth and high inflation, or "stagflation." Call it complacency, but perhaps the best explanation is that investors are betting that cooler heads will prevail. It's not as crazy a theory as it sounds, given the Trump administration's reputation for seat-of-the-pants decision-making. Nicholas Colas, co-founder of DataTrek, describes it as a sort of "trade policy put." In other words, Trump has often equated a rising equities market as a ratification of his policies, and he'll soften his protectionist trade plans on any sign they are proving detrimental to stock prices ahead of the midterm elections.