A tariff macro-theme update.
New York City is awesome! While I’m jam-packed with media appearances in the Big Apple, this market is too interesting to not talk about… even from a cab stopped in Time Square traffic.
Overall, I’ve viewed the indexes as oversold over the course of the past week, with the market pricing in a resolution with the trade war with China (which I view as overwhelmingly bullish). However, as of the last few days, things have changed.
Let me explain how things have shaken up, and three bullish scenarios I’m looking to use…
Last week, President Trump threw a largely unanticipated swing when he threatened Mexico with tariffs, on an escalating schedule if they fail to stop migrants at their borders. For a market that was already teetering at support, around the 200 SMA on the daily charts for the Nasdaq and S&P, this pushed indexes over the edge.
The market doesn’t like uncertainty– in addition to, a determined President who’s soon up for re-election and possesses the unilateral ability to attempt to enforce his campaign promises. I expect this to get much worse. Mexico has never been able to control the flow of migrants across their borders, and I don’t expect them to start now. As such, I expect more bad news ahead, with rising tariffs imposed on Mexican imports — which, in turn, will cause even more market volatility.
I talked about these specific tariffs more in depth on May 31st. You can check that out here, if you missed it.
What do tariffs on Mexican imports mean for Americans?
Rising prices, particularly with the reliance the US has on Mexico for produce — in our stores and restaurants. But, that’s only the beginning. The supply chain’s also a huge issue, and it’ll take companies like Dell years to re-create a supply chain in another country that isn’t impacted by tariffs.
It wouldn’t have been such a big deal if the market leaders would’ve held up on this news, but that wasn’t the case.
The way the FAANG stocks broke yesterday, with the added log on the fire of possible DOJ investigation, suggests something entirely different than what we’ve seen over the course of the past month, and throughout 2019. The market leaders have remained strong, up until now. Just by sheer market weighting alone, if they can’t get it together, there’s no way the rest of the market can. Amazon, Microsoft, Facebook, Netflix, Apple, Google, and Adobe are market leaders. Where they go, the market will follow. If they can’t find support in the next day or so, I expect the selling to get much worse.
As for China…
The president’s proven he isn’t going to back down… especially on the most recent threats on Chinese imports on retail goods (like clothing and shoes). Whereas, the previous rounds of tariffs hit primarily companies and manufacturers, these’ll be directly passed on to consumers — further impacting an already slowing economy.
Why’s this so critical?
We’re in a low inflationary environment, that’s at risk of moving towards a deflationary environment, which could easily lead the US into a recession.
We’re already seeing lower levels of Chinese imports coming into the US, and with additional duties on Mexican and Chinese goods, that’ll further lessen the amount of goods we buy from these countries. An increase in supply without demand continues the deflationary cycle. At this point, the Fed will likely be forced to begin the QE cycle again, less than a year after instituting quantitative tightening, in an effort to avoid deflation and get money back into the pockets of the American people.
But what about the stock market?
As for the stock market, we’re under pressure, and the path of least resistance is to the downside without a major bullish catalyst. The past few days we experienced significant technical breaks that’ll take significant price movement higher to repair.
Right now, I’m watching for a short-term, face ripping short squeeze due to the high put/call ratio and negative sentiment. But with the deterioration fundamental and political environment I don’t expect it to last, unless we find a long-term resolution… and soon.
Without resolutions related to the major macro themes, I expect this short lived rally to be just that — short lived. UNLESS we see one of the following major (bullish) catalyst come through:
- Resolution of the trade war with China without further escalation
- Threats against Mexico not coming to fruition
- Rate cut by the Fed
As the selling gets worse, I expect the Fed to jump in and cut rates (i.e. the Powell put), but I don’t expect Trump to give in, at this time.
These are my three bullish scenarios in which I look for the stock market to potentially rebound and counteract the damage that’s been done to it in May 2019.