The bull market turned nine on Friday but any celebration was decidedly subdued.
On sheer numbers alone, the market seems to deserve much more. Born on March 9, 2009, in the depths of a major recession, this epic stock rally is now the second longest in modern history, turning $1 in stock investments into about $5 through its last peak on Jan. 26.
But that was then. The market has been erratic since late January. Already this year, it has moved up or down at least 1 percent on 17 days, most recently, with a gain on Friday. That’s twice the tally for 1 percent moves for all of 2017.
From the standpoint of many investors, President Trump’s decision to impose tariffs on aluminum and steel has made matters ever so much worse.
While the president’s actual tariff announcement on Thursday wasn’t as severe as it could have been, it still puts the country on a dangerous road, analysts said. “The odds of a really destructive trade war actually happening have ratcheted up quite a bit in the last few days,” said David A. Rosenberg, chief economist and strategist at Gluskin Sheff in Toronto. It can’t be eliminated as a possibility.”
Inescapably, anyone familiar with basic economics and the history of the Great Depression needs to worry about the possibility of a trade war, said Edward Yardeni, an independent stock market analyst.
Mr. Yardeni, the author of a coming book, “Predicting the Markets: A Professional Autobiography,” tried, gamely, to handicap the probability that trade tensions would turn virulent conflict and seriously damage the economy and the markets.
“This trade stuff isn’t good in the short term, we can say that for sure,” he said. “Beyond that, I can’t predict very much with certainty because I don’t really know how far the president is going with this and I’m not sure that he knows either.”
That uncertainty puts investors in an awkward position.
It’s not that the specific actions taken by President Trump — tariffs of 25 percent on steel and 10 percent on aluminum — will wreak global havoc. Steel and aluminum may not be important enough for that: They accounted for only 2 percent of American imports last year, or 0.2 percent of gross domestic product, as The Economist has pointed out.
Furthermore, on Thursday, Mr. Trump carved out exceptions even to this particular trade restriction. He said that for now, at least, he would not impose tariffs on Mexico and Canada, two of America’s closest allies, pending renegotiation of the North American Free Trade Agreement, and might not impose them on Australia, either.
Still the president has begun what, if it continues, would be a colossal shift in longstanding United States policy. Instead of relying on multilateral institutions that have been pillars of world trade — and American power — since World War II, the president vowed to revise America’s approach, stressing bilateral costs and benefits, and national security, very narrowly defined.
The Trump tilt has left many people flabbergasted.
Michael Froman, who served as United States trade representative in the Barack Obama administration, said he was troubled by this possible shift. “I don’t really know what it means to enter a global trade war” as government policy, he said on a conference call at the Council on Foreign Relations, where he is a distinguished fellow.
Serious people, he said, have tried to devise ways to “exit trade wars,” not start them. Mr. Froman pointed out that foreign governments — including close allies — have already prepared lists of American exports targeted for retaliation.
The European Union, for example, says it might begin with American products like Harley-Davidsons, Kentucky bourbon and blue jeans, and go on from there. Once such a process begins, it could spiral downward, with the tit-for-tat tariffs between America and its trading partners during the Great Depression a vivid historical lesson.
The implications are chilling, in the view of many strategists.
On Wednesday, for example, Marco Pirondini, head of United States equities at Amundi Pioneer in Boston, declared in a note to investors that President Trump had begun a “dangerous” and “risky” second phase of his economic agenda. The first phase, he said, “focused on tax cuts and deregulation” with “extremely positive” results for corporate earnings, many taxpayers and investors in the stock market.
Now, however, with the resignation of Gary D. Cohn, the president’s top economic adviser, who opposed Mr. Trump’s shift on trade, it is clear that Mr. Trump “is focused on changing trade relations as a means of reducing trade deficits and incentivizing U.S.-based production,” Mr. Pirondini said.
Many global companies will suffer, he said, adding that Mr. Trump’s policy is likely to be accompanied by “increasing inflationary pressures and margin pressure for corporations, and more volatility for equities.”
In an interview, he added that Mr. Trump was using “theatrical” methods to improve his negotiating position. That could have unforeseen negative consequences.
Mr. Pirondini said he did not expect that the president would actually embrace a full-scale trade war — which he defined as a contraction in global trade that exceeds any associated economic contraction. But he said Mr. Trump’s policy tilt might ignite a series of conflicts with America’s trade partners, to say nothing of the Asian giant that appears to be the real focus of Mr. Trump’s ire: China. Until trade tensions are resolved, he said, the stock market is likely to endure episodes of heightened turmoil.
As if the market needed more drama this year. Mr. Rosenberg of Gluskin Sheff says stocks have entered “a late-stage bull market.” Factors like rising interest rates, soaring debt loads, incipient inflation and stretched valuations have made equities vulnerable, he said.
The stock market is already in what, in Wall Street jargon, is correction territory: By Feb. 8, stocks had declined more than 10 percent from their Jan. 26 peak and haven’t recovered all their losses.
“There is a very good chance that we will have another 10 percent correction, below the trough that the market hit in February,” Mr. Rosenberg said.
By some definitions, a decline of 20 percent or more would end the bull market. That may be semantics, however. A bear market, in Mr. Rosenberg’s view, would be associated with a “pernicious and protracted decline.” Because the economy is reasonably strong — and stimulus from the recent tax cut has not had its full effect — stocks could rebound quickly, he said.
Whatever you call it, Mr. Rosenberg counsels prepare for a coming decline by raising the cash portion of their portfolios.
Many other strategists are more sanguine.
Ed Clissold, chief United States strategist with Ned Davis Research Group, said that a technical analysis of the market showed that it had “retested” important support levels. “Market breadth isn’t what we’d want to see,” he said, “and if the market remains choppy for a very long time, that will be a concern. But so far, so good.”
Laszlo Birinyi, an independent analyst who has weathered decades of crises, said, “I don’t think we will know how important these trade issues are for a long time, so it’s best not to pay too much attention to them. Many big events in the news — Brexit, the November election — set off panics but turn out to be fine for the stock market.”
Mr. Yardeni points to the benefits of the new tax law, which has nearly doubled Wall Street’s expectations for the earnings growth rate of the Standard & Poor’s 500-stock index, to 19 percent from 10.
“That hasn’t all been factored into stock prices yet,” he said. “We may have to get through these trade issues first. But I don’t think the bull market is over yet.”