Unless the headlines out of Washington improve on this Easter Sunday 2018 (by the way, Happy Easter!!), we won’t be looking for another monster Monday rally tomorrow.
The President has been active on Twitter this morning:
“Trump lashed out at Mexico and threatened to “stop” the North American Free Trade Agreement, saying Mexican authorities are not doing enough to secure the border with the United States.”
Note: While the market may or may not react come tomorrow morning to the President’s tweet, it flies directly in the face of last week’s commentary from the U.S. side of the negotiating table. Which suggests that we should expect some compensating commentary in the coming days (if not sooner), and explains why, beyond the opening paragraph, I didn’t mention NAFTA in yesterday’s log entry (featured below).
The following entry into our internal market log offers some insight into the whys and wherefores of recent volatility along with my thoughts on near-term prospects:
3/31/18
Last week’s action was all about protectionist push and pull in Washington. The week started with a huge rally on Monday, following Sunday’s comments by Mnuchin that he felt constructive talks with China would circumvent the need for tariffs. Monday morning Navarro made bullish comments regarding NAFTA. The market is set up very nicely after February’s correction — and further volatility in March over the US tariff threat — to move higher through the end of April. I expected a strong week (last week) after Mnuchin’s comments.
Tuesday morning the market opened up strong, then a headline crossed that Wilbur Ross had just announced that the U.S. is on the cusp of severely limiting China’s ability to invest in U.S. institutions. The negative breadth of such announcements reaches potentially deep into the capital account at a time when it needs strong foreign investment more than ever. As I suspected it would on the news, the Dow went from up 200 points to down 400+. The market traded lower until Thursday (was closed on Good Friday), which saw a strong across the board rebound. I suspect it had something to do with the U.S. ambassador to China suggesting that the U.S. will proceed prudently and hoped that the issues will be addressed via positive dialogue.
Just updated the technical indicator spreadsheet and scored the PWA Index. General conditions remain favorable for equities going forward. Seasonality for the next 4 weeks is extremely strong, particularly coming off of a draw down. If the Administration continues to soften its protectionist stance odds favor substantial gains in April.
As we get into and beyond May and toward mid-term elections, I expect a continued high level of volatility, amid a range bound market. That said, odds favor higher highs if somehow the Administration ditches the protectionism.
If it becomes clear that Trump really intends to impose tariffs on China and to substantially limit foreign direct investment into the U.S., the market bias will be lower, the dollar will likely continue downward (although higher interest rates might offer support if it turns out the U.S. economy [present expansion] is in a strong enough state to survive a trade war*) and general conditions (beginning with sentiment) will deteriorate as the year unfolds. This will pose a real challenge for the Fed as it attempts to reload in preparation for the next recession.
*The dollar tanked and stocks dropped 25% following GW Bush’s (looking to gain political favor from the steel industry heading, ironically, into mid-terms) steel tariffs of 2002. While the timing suggested that the tariffs were the culprit, general conditions were not nearly as bullish as they are presently. Obama’s more surgical steel tariffs and aggressive car tire tariffs (2009), while resulting in a notable net negative for the U.S. economy, occurred amid otherwise improving macro conditions, thus the market was able to absorb the economic shock…