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Trump’s Ongoing Trade Tiff Threatens to Slow Industrial ETFs

This article was originally published on ETFTrends.com.

As the Trump administration drags on the trade negotiations and keeps extending speculation over a potential trade war, industrial stocks and industrial ETFs will likely continue to underperform U.S. markets.

The Industrial Select Sector SPDR (XLI) , the largest exchange traded fund tracking industrial stocks, declined 9.3% over the past three months, while the S&P 500 fell 5.5%.

Meanwhile, the ProShares UltraShort Industrials (SIJ) , which tracks the inverse 2x or -200% daily performance of the Dow Jones U.S. Industrials Index, jumped 17.5% over the same three month period.

The ongoing uncertainty over the Trump administration's trade policy threatens to slow corporate spending and drive up costs, which could weigh heavily on the industrial sector, with the tariff-sensitive S&P 500 industrial sectors continuing to underperform the broader market.

“At the end of the day, the market absolutely hates uncertainty,” Dave Lutz, head of exchange-traded fund trading at JonesTrading, told the Wall Street Journal. “It can handle bad news but it cannot handle uncertainty.”

President Donald Trump has given the European Union, Canada and Mexico until June 1 to negotiate deals that would exempt them from U.S. steel and aluminum tariffs. The White House has already made agreements in principle with Argentina and Brazil to avoid the tariffs. The administration has also imposed tariffs on Chinese steel and aluminum exports while China retaliated with tariffs on U.S. agricultural goods.

Trade Talk Uncertainty

The uncertainty surrounding the trade talks has fueled speculation that companies are delaying hiring or spending plans until they have a clearer idea of what the administration will do.

“We’re somewhat worried about what this type of uncertainty means for the economy going forward,” Torsten Slok, an economist at Deutsche Bank, told the WSJ.

For example, the U.S. labor market has been adding fewer jobs in states with high production of steel, aluminum, aircraft, cars and soybeans, according to Deutsche Bank. Signs are pointing to a slowodown in job creation in trade-sensitive industries, like industrials.

Furthermore, the trade talks has also increased the likelihood of higher end costs due to tariffs on international goods.

“We expect steel and other commodity costs to be a headwind all year,” Bradley Halverson, chief financial officer at Caterpillar Inc., said on an earnings call. Caterpillar joins other companies including Harley-Davidson Inc. and Polaris Industries Inc. in revealing over recent earnings calls that tariffs are driving up commodity prices that had already been climbing, and some expect to pass on costs to the end consumer.

For more information on the industrials sector, visit our industrials category.