President Trump’s trade war risks disrupting what historically has been a solid year for stocks: The year before a presidential election with an incumbent running for re-election, such as 2019.
According to Bank of America Merrill Lynch, the S&P 500 (^GSPC) has never been down during one of these years.
The stock market was off to a strong start in 2019, after a bruising end to 2018. But the market’s 18% year-to-date gain as of early May was interrupted by a brutal month of escalated trade tensions that started with a tweet from Trump on May 5. There, he vowed to raise existing tariffs on China. The news didn’t sit well with stocks, which ended up retreating from its record highs reached just days earlier. After weeks of volatility Trump roiled investors again with a May 30 tweet calling for a 5% tariff on imports from Mexico amid immigration issues at the Mexico-U.S. border. The 5% tariff could increase to 25% in the coming months. The news sent the S&P 500 down 1.3% the following day.
With the latest trade worries, the S&P 500 is now up roughly 10% for the year. A continued negative reaction by investors to the trade war could threaten the historical strength that Bank of America Merrill Lynch points to.
Though there have been two years which were years prior to a presidential election with an incumbent running for re-election where the S&P 500 posted no growth: 2011 and 1939. In some of the other years, 1995, 1991 and 1983, the S&P posted growth of more than 25%.
What could give investors hope is this: Bank of America Merrill Lynch notes that Trump may listen to the message the stock market is sending on tariffs.
“Many suspect that if the capital markets throw enough of a tantrum around tariffs, President Trump is likely to ease back on his tough talk as we move toward the 2020 presidential election,” the analysts wrote.
Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.
More from Scott:
What the plunging 10-year Treasury yield says about the economy and stock market
Why one top strategist is bullish on tech even with lingering trade worries
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