The U.S.-China trade war escalated again today but Wall Street seemed downright bored with the theatrics. The main stock averages soared higher, as investors stifled a yawn at the latest round of tariffs and focused instead on economic growth and strong earnings.

But a good day on Wall Street doesn’t mean trade tensions have magically disappeared.

This morning, I was listening to a pundit on CNBC trying to reassure viewers that damage from the U.S.-China trade war is, to use his word, “overestimated.” Both economies are “relatively closed,” he argued, which means tit-for-tat tariffs are simply negotiating tactics. He advised investors to mostly ignore trade tensions.

Observing this guy, I suddenly thought of Woody Allen.

In his 1982 film A Midsummer Night’s Sex Comedy, Allen’s character says: “I’m a financial adviser. I help people with their investments, until there’s nothing left.”

Want to invest until there’s nothing left? Follow the fatuous advice of the hacks on financial television.

Make no mistake: this global trade war is a clear and present danger to your portfolio. Investors who shrug at the worsening U.S.-China rift are misguided.

After the markets closed yesterday, President Trump announced that the U.S. would impose 10% tariffs on $200 billion worth of Chinese goods. Collection of tariffs on the U.S. list will start on September 24 but the rate will increase to 25% by the end of 2018. Trump threatened duties on about $267 billion more if China retaliated.

China said Tuesday that it had no choice but to respond in kind. If the White House imposes the additional tariffs it would encompass nearly all remaining U.S. imports from China.

The following chart (compiled with Department of Commerce data) ranks the top 10 trading partners of the U.S. in 2017, by import value in billion U.S. dollars:

The U.S. and China are playing a game of chicken, on a massive scale.

The trade war already is hurting the bottom lines of companies across a wide swath of industries. Tariffs are raising input costs, dampening demand, triggering lay-offs, disrupting supply chains, upending strategic plans, and undermining management confidence.

These trade headwinds are occurring at a particularly bad time.

According to Bankrate’s latest Economic Indicator survey of 18 top economists, 78% of those surveyed think a recession will occur within three years. Bankrate’s quarterly survey is an influential and reliable barometer.

FAANG: long in the tooth…

What’s more, the market is showing “bad breadth.” Positive market breadth occurs when more stocks are advancing than declining, signaling that the bull has room to run.

Conversely, bad breadth occurs when a disproportionate number of securities are declining, a sign of bearish momentum.

So far this year, a handful of large-cap stocks have accounted for most of the market’s rise. That’s a classic red flag of an imminent correction.

Another danger for the stock market is Federal Reserve tightening. The next two-day meeting of the Fed’s policy-making Federal Open Market Committee (FOMC) starts on September 25. The analyst consensus is that the FOMC will announce a rate hike, which would be the third one this year.

There’s an old Wall Street adage: “Three hikes and you’re out,” whereby the third interest rate increase by the Fed in a single cycle usually leads to a decline in stocks.

Even worse, the Fed could be on track for a fourth rate hike this year, as inflation heats up. Price pressures slightly abated in August but they continue their long-term climb.

Additional red flags can be found in Bank of America Merrill Lynch’s latest monthly survey of investor behavior, released today.

The survey showed that nervous investors are increasing their cash positions, but to me, here’s the most troubling fact: the “most crowded” trade for the eighth straight month was “Long FAANG and BAT,” acronyms for U.S. tech giants Facebook (NSDQ: FB), Amazon (NSDQ: AMZN), Apple (NSDQ: AAPL), Netflix (NSDQ: NFLX) and Alphabet’s (NSDQ: GOOGL) Google, as well as China’s Baidu (NSDQ: BIDU), Alibaba (NYSE: BABA), and Tencent (OTC: TCEHY).

The tech sector rally is getting long in the tooth. The shrewd move is to reduce your exposure to the mega-cap tech darlings, which are hovering at excessive valuations. Running with the herd has a poor track record.

Tech stocks have climbed their way back to the lofty heights of the dot-com boom. The windfall from U.S tax cuts has helped keep them aloft, but the benefits should soon wear off, especially as countervailing forces such as the trade war and rising interest rates gather steam.

The tech sector still offers ample opportunities for outsized profits, but don’t pile into FAANG-BAT, certainly not at their current valuations. Look for underappreciated, smaller tech stocks that aren’t hyped on TV. The recent tribulations of once hot “story stocks” such as Tesla (NSDQ: TSLA) and Snap (NYSE: SNAP) should be instructive. Woody Allen notwithstanding, current market risks are no joke.

Tuesday Market Wrap

• DJIA: 26,246.96 +184.84 (0.71%)
  
• S&P 500: 2,904.31 +15.51 (0.54%)
  
• Nasdaq: 7,956.11 +60.32 (0.76%)
  

Tuesday’s Big Gainers

• Viking Therapeutics (NSDQ: VKTX) +87.30%

Biotech’s liver treatment gets positive trial results.

• Tilray (NSDQ: TLRY) +28.95%

Marijuana firm gets DEA nod to import pot for medical study.

• ChemoCentryx (NSDQ: CCXI) +9.82%

Major investor boosts stake in biotech.

Tuesday’s Big Decliners

• Primerica (NYSE: PRI) -7.73%

Analysts turn bearish on financial services firm.

• General Mills (NYSE: GIS) -7.60%

Sales fall short at consumer foods giant.

• Workiva (NYSE: WK) -5.15%

Enterprise cloud provider’s growth lags.

Letters to the Editor

“Do you recommend inflation hedges?” — Harold R.

As inflation stirs, you should hedge now rather than later. Broadly speaking, inflation hedges worth considering include precious metals, inflation-indexed bonds, and agricultural commodities.

Questions or comments? Drop me a line: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.