(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.
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