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Post Tariff Stress Disorder: A Look Back at '18
Winnie Cisar - Global Head of Strategy, CreditSights
Zachary Griffiths, CFA - Head of IG & Macro Strategy, CreditSights
EXECUTIVE SUMMARY
- As clients consider how a potential trade war might affect US corporate credit markets, we look back at 2018-2019 as a case study. There are notable similarities and differences in the macroeconomic conditions and trade policy of that period compared to current circumstances and expectations.
- The initial moves in Trump’s 2025 trade discussions have been largely uneventful, with issues being quickly resolved or delayed. However, the threat of additional tariffs and escalation could impact corporate and consumer behavior. With inflation above the Fed’s 2% target, there may be actions that conflict with the Fed’s disinflationary goals, resulting in a near-term policy pause and uncertainty about the medium-term path of monetary policy.
- During the 2018-2019 US/China trade tensions, there was significant spread widening and a revaluation of equity markets, with notable increases in both IG and HY spreads. Although credit markets recovered much of this widening in early 2019, spread volatility persisted throughout the year. The previous proactive rate cuts by the Fed in 2019, which benefited corporate credit, may not be as feasible now due to higher inflation compared to 2019.
- The risk of a Fed policy error, a gradually weakening fundamental backdrop, and tight credit spreads contribute to a cautious outlook for US IG & HY in 2025. If the current administration’s tariff strategy shifts to a trade conflict, historical spread patterns from 2018-2019 suggest potential widening in spreads.
- We maintain our 2025 year-end spread targets, considering that higher yields today compared to 2018 may lead to less spread widening than previously observed if global trade conditions deteriorate.
- As clients evaluate the potential impact of trade tensions on US corporate credit markets, we draw parallels with 2018-2019, noting similarities and differences in macroeconomic conditions and trade strategies.
In Trump’s first term, tax reductions were prioritized over tariffs initially. Unlike today, early in Trump’s presidency, there were challenges with personnel and communication, whereas the current administration appears more organized in its policy approach.
While initial trade discussions between Trump and Chinese President Xi in 2017 were unsuccessful, Trump initiated tariffs in January 2018 following the Tax Cuts and Jobs Act.
In contrast, in his current term, Trump has swiftly announced tariffs on multiple countries and products, broadening his focus beyond China and steel/aluminum, as seen in 2018.
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