Trade Tensions Topple Markets
Fresh from making new ALL TIME HIGHS, stock markets were jolted last Sunday by the news that the long awaited trade deal with China was in trouble. Reportedly, certain concessions by China were withdrawn, triggering a tweet from President Trump threatening to raise Tariffs on Chinese goods from 10% to 25%.
As a result, volatility exploded. The Dow Industrials (Dow) opened much lower for trading on Monday morning, nearly 500 points. While most of this early loss was erased by the closing bell, fears re-emerged on Tuesday sending all the indexes 1.5% to 2% lower.
The stacked charts on the left show the incredible similarity between the stock market’s summer peak and current peak. In both cases, the S & P 500 (SPX) rallied to the 2900 level. In addition, the termination of each rally was accompanied by a surge in volatility from 12% to more than 20% nearly overnight. (Lower graph in Blue).
We know from history that the market top realized in late September/early October, 2018 preceded a gut-wrenching 20% Waterfall decline in most equity indexes. Is history about to repeat? Is the Bull Market of 2019 over?
How Did Trade Tensions Affect US/China Trade in 2018?
Trade Wars have few beneficiaries and many victims. The only beneficiaries are inefficient industries and their workers who are protected from stiff foreign competition through the imposition of Tariffs or Quotas. In general, both parties to a Trade War are negatively impacted. “Can Anyone Win A Trade War?”. (https://markonomics101.com/2018/07/09/can-anyone-win-a-trade-war/).
The Trade relationship between the US and China has historically been non-reciprocal. Prior to the initial imposition of Tariffs of 10% on $250 Billion of Chinese imports last year, the average rate levied was a fairly minor 3%. By comparison, US exporters paid an average of 8%. Today, the average import from China is levied at 12% and US Exports are charged 20%. (https://piie.com/blogs/trade-investment-policy-watch/will-us-china-trade-deal-remove-or-just-restructure-massive-2018).
So far, the higher Tariffs have had only a minor impact on US/China trade, albeit negative. In 2018, the United States imported $540 Billion in Chinese Goods while exporting a fairly modest $120 Billion. US exports to China FELL by 7.6% year over year while imports from China GREW by 6.7%. It is possible that imports were artificially boosted by the ongoing threat of even higher tariffs of 25%.
Originally, Tariffs on Chinese Goods were scheduled to rise to 25% on January 1. That deadline has been postponed 3 times, but now looms very close. The latest deadline laid out by the administration is Thursday, May 9th at Midnight.
How Did Trade Tensions Affect Overall US Trade in 2018?
Despite the threats and Tariff Saber rattling, US Trade BOOMED last year. Imports of $3.1 Trillion INCREASED by more than 7% over 2017, and exports of $2.5 Trillion GREW in excess of 6%. (https://www.politico.com/story/2019/03/06/us-china-trade-deficit-record-1242498). Where was the damage??
By comparison to virtually the entire developed World, the US is far more self-sufficient. Even if the United States LOST ALL of its export commerce to China, the effect on Gross Domestic Product would be LESS than 1/10th of 1%. Not so with China. Sales of Chinese goods to the United States of more than 1/2 Trillion Dollars annually would be affected and could impact their entire economy.
Current tariff rates have had little impact on consumers, thus far. The products most affected by higher Tariffs on Chinese imports into the US would be clothing and electronics. So far, the impact of last year’s hikes is hardly noticeable. An increase to 25%, however, is bound to make certain goods pricier domestically.
Is The Bull of 2019 Still Intact?
The surge in market volatility has had an ominous impact on the technicals. The Slide Show below of the Key Equity indexes illustrates the damage. Some key takeaways are as follows:
- The Dow, S & P 500, and Nasdaq 100 (NDX) all appear to have made VERY BEARISH Double Tops. The NDX made slightly higher highs, the SPX about equivalent highs, and the Dow slightly lower highs.
- The Russell 2000 and Dow Transportations have lagged BADLY and failed to even approach new Highs.
- The Nasdaq 100, Russell 2000, S & P 500, and Dow Transports have all broken BELOW rising Trend Lines.
- The Dow appears to have made a short term ROUNDED or DOME Top.
- All of the Major Indexes are now NEUTRAL and expected to test next lower support before any further gains can be made. If they fail to hold those support zones, they will turn BEARISH.
Cash Is Prudent Again
It never hurts to wait out a period of turbulence. The stock markets were due for some type of pullback. “Trade tensions” are the perfect excuse.
Cutting through the wild speculation, this issue is almost CERTAIN to be resolved this year. Why? At no time in our history has the outcome of an upcoming election been as dependent on the level of stock prices and performance of the economy. “Charts, Markets, and the Presidential Elections”. (https://markonomics101.com/2019/02/16/charts-markets-and-the-presidential-elections/).
What remains to be seen is whether this is the prelude to a “pause” in the stock markets or an early termination of the Bull Market of 2019. Either is entirely possible. The Charts will tell us. For now, it’s best to remain on the sidelines.
Be Informed, Not Misled!