Fear Factor: Stocks Post Worst Day Since January As Tariff Concerns Accelerate

Even as China and the U.S. prepare for new trade negotiations, the market had its worst day since January as fears of new U.S. tariffs continued to flare.

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6 min read

Key Takeaways

  • Stocks take biggest plunge since January on trade fears

  • Tariff overhang starting to eclipse other factors, including data

  • Treasury yields nearing another potential inversion

(Tuesday Market Close) When tariff fears flare, most other market news gets ignored. That appeared to be the case Tuesday, and this time, the end of-day rescue squad arrived a bit too late to clean up most of the carnage. 

Many of the stocks that helped lead the long rally got taken out to the woodshed as major indices cratered in their worst daily performance since January.

Unlike on Monday, the late comeback was a bit muted, with Wall Street racking up sharp losses in the final hour of trading before closing slightly off the weakest levels. Monday’s afternoon revival came amid higher hopes of things smoothing out between the U.S. and China. On Tuesday afternoon, the road started looking rougher. If there’s one thing markets hate, it’s uncertainty, and that appears to be back in a major way

For many investors, this might trigger unpleasant memories of last fall. However, it’s way too early to start panicking. People might want to keep in mind that by the end of last week, stocks were arguably priced for perfection, making them extra-vulnerable to any bad news. It’s not too surprising to see a pullback after nearly four months of going almost straight up and revisiting all-time highs.

Tariffs Back In the Equation

It’s also a bit early to give up hopes for a trade deal. The positive news late Monday was that China’s negotiators were still coming to the U.S. That’s not something you’d expect to see if there was a complete impasse. Nothing changed there on Tuesday, as talks are still expected to take place.

That said, many media outlets were reporting that it looked more likely President Trump’s threatened new tariffs could take effect by later this week. The rally between January and May had basically taken tariffs out of the equation, and you could argue that on Tuesday, the market started putting them back in.

Tech companies took an especially big hit Tuesday, with semiconductor firms down significantly. These are among the companies that could take the biggest blow from new tariffs, since they have huge markets in China.  See figure 1 below.

FIGURE 1: SOX RED. The Philadelphia Semiconductor Index (SOX - purple line) trailed the broader S&P 500 Index (SPX - candlestick) over most of the last year, in part due to the ongoing trade discussions with China. Semis staged quite a comeback in the early part of 2019, but this week's trade tensions seem to have weighed heavily on chipmakers. Data source: S&P Dow Jones Indices, Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  


Selling Tough on Companies With China Exposure, Including FAANGs

Multinational companies like Apple (AAPL), Microsoft (MSFT), Boeing (BA), and Caterpillar (CAT) also could have a lot to lose if U.S./China relations go downhill, and their stock performances reflected that Tuesday.

The FAANGs, which got clobbered last fall when the first missiles of the trade battle started flying, all got punished Tuesday. One big story of early 2019 was how the FAANGs and semiconductors recovered from Q4 weakness. Now that story looks like it might have another chapter.

On the other hand, financials mostly held on pretty well, despite a rally in the bond market Tuesday. There were some exceptions, but they hung in better than some might have expected. The 10-year yield was trading below 2.45% by late Tuesday, putting it barely above the three-month yield. An inversion in March when the three-month yield eclipsed the 10-year yield triggered concerns about a slowing economy, and there’s some fear it could happen again.

Utilities were another sector holding in there Tuesday, maybe getting some help from the bond market. When Treasury yields fall, some people might be looking for stocks that offer better yields. This sort of cautious trading isn’t really anything new. We saw some signs of investors rolling out of equities and into fixed income back in April. The overhang of fear was there, and many people had trouble believing the rally could keep rolling along the way it had.

Did Solid Economic Numbers Embolden Negotiators?

Everyone seems to be preparing for the worst, maybe in part because so many investors remember how the market plunged last fall. This psychological factor, kind of like a post-traumatic stress disorder, could be accelerating losses on Wall Street. However, the resumption of trade negotiations in Washington this week is a positive sign, with The Wall Street Journal reporting that China felt it had too much to lose from a full breakdown in talks. Some analysts said the U.S. administration might also feel it can’t run too far from the meeting table out of concerns for the economy ahead of next year’s election. We’ll have to wait and see.

What is interesting is how as the economic numbers in both the U.S. and China improved, the two countries appeared to get less flexible in their trade positions. A few months ago, when it looked like economic numbers were slowing down, it seemed like both sides were pretty eager to negotiate. Now, the numbers look pretty good and earnings season has been better than expected, and both sides have gotten emboldened.

As stocks turned lower, volatility came roaring back. The market’s most closely-watched “fear indicator,” the VIX, jumped above 20 on Tuesday for the first time since early January. The 20-level in VIX is where we’ve often seen it go when trade concerns flare up. Typically, the VIX has gone back under 20 as those concerns fade, so it might be a helpful leading indicator of just how fearful people are.

With all the focus on China and tariffs, some economic data this week might not get as much attention as normal. The Producer Price Index (PPI) for April is due Thursday, followed by the April Consumer Price Index (CPI) on Friday. The JOLTs job openings report for March released Tuesday topped analyst expectations, another sign that employer demand remains pretty solid.

It seems like a long week, but it’s only Tuesday. Barring some kind of major breakthrough overnight, it’s possible Wall Street could open Wednesday morning with the same tariff overhang that weighed on it today. Another thing to consider is that as earnings season dies down, the tariff news might not have many rivals for headlines. Buckle up.

Good Trading,

JJ

@TDAJJKinahan 

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Key Takeaways

  • Stocks take biggest plunge since January on trade fears

  • Tariff overhang starting to eclipse other factors, including data

  • Treasury yields nearing another potential inversion

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