Tariff Threats Causing Turmoil, but No Signs of Panic Selling

U.S. equity indexes opened Tuesday’s cash session sharply lower, but well off their lows. The early selling pressure was fueled by President Trump’s latest threat of additional tariffs against China and Beijing’s warning of retaliation. Both moves increased fears of an impending trade war between the world’s largest economies. The sell-off also wiped out the Dow’s gains for the year.

The details of the threats aren’t really important at this time. It’s just important to know that investors reacted to the news in the traditional way. They sold stocks then moved money into safe-haven assets like the Japanese Yen and U.S. Treasurys. Gold, however, continued to suffer from the lack of demand, perhaps related to expectations of higher interest rates.

The price action suggests that investors are trying to figure out how to play the developing trade war game. Remember that today’s price action is being fed by threats, not actual tariffs. Like the previous threats, it may take weeks or months to actually impose the sanctions.

Since we haven’t actually changed the major trend in stocks on today’s news, I suspect that portfolio managers are simply paring positions and preparing hedges for different scenarios that could develop. I don’t sense a panic in the markets and so far the moves have been orderly with investors respecting key technical support levels.

The professional may understand that both the U.S. and China are using negotiating tactics to see who blinks first. The important thing is that both sides are still at the negotiating table. Investor confidence and optimism may be getting a little shaken at this time, but in my opinion, there is nothing in the news that suggests a long-term bearish trend is developing.

With the Dow now trading lower for the year, this suggests the tariffs are likely to affect the iconic companies the most first. This includes bellwether corporations like Boeing, Caterpillar, and Ford.

The S&P and NASDAQ are likely to take a bigger hit if China goes after growth companies like Apple, which has sold more iPhones to Greater China than it has to the U.S. However, this company may be last on the list for China since many of the parts for iPhones and the instrument itself is built in China. This is probably best explains why the Dow is down for the year and the NASDAQ is four days off its high for the year.

In the end, the U.S. may win the trade war, but there will be losses in a few of the battles, particularly for U.S. soybean farmers. However, China doesn’t have as many weapons as the U.S. because it doesn’t import nearly as much American products compared to what the U.S. takes of Chinese products.

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So at this time, continue to look for posturing by the U.S., China and Wall Street professionals. As long as the two trading partners are negotiating, there is no need to panic sell with the U.S. economy so strong. If anything, investors should be looking for bargain prices because the stock market trend is still strong and prices have been a little high lately. Furthermore, all we’re looking at are threats today. As far as I know, no new tariffs have been implemented.

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