President Trump's tariff announcement seemed to spark fear in the market Thursday, sending stocks to their third straight day of sharp losses.
(Friday Market Open) March came in like a lion, blowing a cold breeze on the stock market amid new concerns about the potential for a trade war. Even warmer words from Fed Chair Jerome Powell didn’t seem to enthuse investors all that much as stocks fell sharply for a third straight session.
The day started off with fingers poised over the “sell button” ahead of Powell’s testimony, but most investors didn’t press the button until President Trump announced plans to implement tariffs on steel and aluminum imports next week. The U.S. will set tariffs of 25% for steel and 10% for aluminum, President Trump said, though he didn’t explicitly call out which countries these would apply to.
Unlike Tuesday, when many analysts blamed Powell for sinking the ship, the Fed Chair doesn’t wear this one. Thursday’s losses appear to land squarely on the president’s tariff talk. The tariffs Trump is implementing could pose real challenges to some industries, including ones you might not immediately think of. Consider, for instance, soda and beer makers that rely on cans.
What also might be spooking people here is the prospect of faltering economic relations between the U.S. and China. Remember, U.S. stocks took a brief dive back in January after a media report that China might consider slowing or halting its purchases of U.S. Treasuries. China denied that report. If the two countries tangle over tariffs, however, that could lead to renewed fears about China’s interest in U.S. Treasuries. Even rumors about China backing off from its Treasury purchases would likely feed into the rate worries that already dog the U.S. market.
There was a dichotomy across sectors that might get affected by steel and aluminum tariffs Thursday. Steel company stocks climbed, while companies like auto makers that depend on those products saw their shares descend. That might help explain why the materials sector, which includes many companies that make the raw materials for products, performed better than industrials.
Other weak sectors included info tech and financials, both of which are often seen as leaders in a rallying market. Both of these sectors have fluctuated vs. the broader S&P 500 index (SPX) over the last five days, with financials generally trending a bit below the SPX and info tech doing a little better. Overall, the interest rate-sensitive, so-called “defensive” sectors like utilities and telecom have done best during the volatility of the last week.
The automotive sector also took it on the chin, thanks in part to tariff worries but also in light of some rather dismal-looking February sales for every car company aside from Toyota (TM). The numbers were bad almost across the board, which is very concerning. This might be more of an industry issue than anything else. Car sales were huge between 2013 and 2016, and now it looks like the car companies might be paying for that. Cars last a long time now, and people don’t necessarily need a new car every few years. Surprisingly, SUV and crossover sales suffered a lot last month.
Getting back to the Fed for a moment, it sounded today like Powell was trying to ease the worries he might have caused earlier this week in his first set of congressional testimony when many thought he had hinted at an additional rate hike. This time around, he made it clear he doesn’t believe the economy is overheating, and that there’s still room for wages to rise without setting off an inflationary firestorm. The market seemed to react fondly to Powell’s words, with the Dow Jones Industrial Average ($DJI) jumping 150 points early in the session with Powell at the microphone.
At that point, it looked like investors might be able to put off tariff worries until another day amid reports in the media that an announcement might get shelved. Soon after, however, came the president’s words, and the market never really recovered.
If you want to look for positives, some buying interest did seem to creep in near the day’s lows. Several times, the $DJI fell 500 points or more late in the day, and each of those it bounced back. Still, it looks like the general mood is to find excuses to sell, and tariffs happened to be the excuse du jour. From a sentiment standpoint, we might be back to the early-February psychology, when every rally started being seen by some as a selling opportunity.
As stocks stumbled Thursday, investors appeared to embrace some fixed income investments. Yields on the 10-year Treasury bond, which move in the opposite direction of the bond price, were down near 2.8% by the end of the session on Wall Street, the lowest level since Feb. 9. Perhaps ominously, Feb. 9 marked the day the SPX put in its near-term bottom of 2,532.69. By Feb. 26, just three days ago, it had risen back to 2,780, but by the end of the day Thursday it was down about 100 points from that peak.
As stocks and bonds went their separate ways, volatility kept soaring, with the VIX climbing 10% during the session. The only data of note on Friday is Michigan sentiment, but it’s possible the turbulence could continue even without much in the way of new numbers to crunch.
FIGURE 1: CARS STALLING.
A Dow Jones index that tracks automobile and auto parts makers (candlestick) is under-performing the broader S&P 500 Index (SPX - purple line), over the last month. The tariffs announced by President Trump today, along with February’s weak sales figures, could possibly help extend the damage for auto makers. Data sources: Dow Jones & Co., Standard & Poor's. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
The TD Ameritrade Network is brought to you by TD Ameritrade Media Productions Company. TD Ameritrade Media Productions Company and TD Ameritrade, Inc. are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies, services or commentary.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2018 TD Ameritrade.