May 10, 2019 – Stocks posted a losing week this week as the trade war roared back to life.
President Trump tweeted over the weekend that the pace of talks was too slow for his liking and that he was going to raise tariffs on $250 billion in imports from China to 25% from 10%.
That came to pass as of 12:01 a.m. this morning. The president has also threatened to tariff the more than $300 billion in goods imported from China that are currently untaxed, although he hasn’t said when that would happen. In fact, after a pretty ugly morning in the market, Trump tweeted that talks will continue and it is possible that tariffs could be removed in the future.
The lack of a deadline for the additional tariffs is notable. While we appreciate the president’s apparent concern for the stock market (he also tweeted about 401(k) balances today), we’re a bit skeptical about how well the latest round of talks actually went given that Chinese negotiators left the U.S. Trade Representative’s office before lunch today and no further talks are currently scheduled.
China has said it will retaliate for the higher tariffs, but those measures have not yet been announced.
Meanwhile, next week we’re expecting a ruling on auto tariffs that, if imposed, would certainly spark retaliation from Europe and possibly Japan.
That seems like a lot of shoes in the air for a stock market where, as of yesterday, FactSet is reporting that companies that have reported earnings, plus the estimates for those not yet reported show an earnings growth rate of -0.5%.
The broader economy still seems to be quite healthy, but the stock market isn’t the economy. At some point tariffs are going to cut into profit margins, and with earnings already at least taking a pause from growing, the fundamentals of the market start to look a little stretched, particularly since, as FactSet points out, analysts are predicting that earnings will decline in the current quarter as well.
A lull in earnings growth could be nothing to worry about in a strong economy. Earnings declined for a quarter in 2016 and then resume growing again, but the threat of a trade war is likely keeping some corporate investment on the sidelines, which can slow growth into the future.
All told this week, the S&P lost 2.43%, the Nadsaq fell 3.08%, and the Dow Jones lost 2.13%.
Support and resistance levels haven’t changed much over the past week. You can look at last week’s charts if you’d like to see where we are on that front. Instead, we’re going to look at comparison charts for the three major indices.
The Nasdaq has provided leadership, in both directions, over the past year. It lead the way higher last summer, lead the way lower in the fall and lead us back to new highs again in 2019. Microsoft in particular has been particularly strong this year and is currently the biggest company by market cap. The tech-heavy Nasdaq isn’t immune to trade disputes. Software makers may be less hard-hit than some other sectors, but Amazon sells a tremendous amount of merchandise that originates offshore, as does Apple, which are the next two largest Nasdaq companies.