Markets Might React To Tough Talk On Tariffs, Potential European Instability

he markets were on a downward slope in the early going today as traders absorbed the weekend’s rhetoric about tariffs and a potential trade war across the globe coupled with news of possible instability in Europe.

The Dow Jones Industrials ($DJI) had dropped as much as 180 points in pre-market trading, but moved off those lows ahead of the open. The S&P 500 (SPX) and the Nasdaq Composite (COMP) were also heading lower at the open.

Fears of a potential global trade war appeared to be further fueled as President Trump traded tweets with overseas officials opposed to tariffs on aluminum and steel.

Manufacturing executives who use the metals for everything from packaging to big appliances warned of price surges, shortages and retaliatory trade barriers, according to the Wall Street Journal. But administration officials took to the Sunday talk shows to downplay concerns. “The notion that it would destroy a lot of jobs, raise prices, disrupt things, is wrong,” Commerce Secretary Wilbur Ross said on ABC, ramping up comments he made Friday on CNBC. 

Earlier today President Trump pulled NAFTA discussions into the tariff talk, tweeting that “Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed.” 

There is still a load of uncertainty about how tariffs, and ultimately a trade war, might shake out. But it could be a good time to remind investors that the history of Trump administration moves has tended to start with a big statement that typically ends with a more pragmatic solution.

Meanwhile, exit polls in Italy showed that the populist challenge in Europe looked to be alive but came up short on a clear winner to support a new parliament. That could lead to a period of political instability throughout Italy, Europe’s fourth-largest economy, according to many analysts.  

Elsewhere, yields on 10-year Treasury notes didn’t challenge the 3% range that many traders were expecting last week and were slipping in the early going. That’s not to be totally unexpected as investors typically turn to safety assets such as bonds during a period of uncertainty. In the early going, the 10-year yield stood at about 2.84% and the two-year at about 2.22%.

This week’s economic and earnings calendars don’t look as jammed as they were last week, but this week ends with perhaps the most highly-watched monthly report— Friday's release of unemployment data. On the earnings front, Target (TGT) reports in what has been a boom-or-bust earnings season for retailers.

And a final word on tariff talk: it’s not likely to go away anytime soon so investors might want to take a steady approach in the coming days. 

FIGURE 1: SMALL CAPS WIN THE DAY. The strength of the Russell 2000 Index (RUT), plotted here from Thursday and Friday vs. the S&P 500 (SPX - purple line) might suggest a rotation out of big-cap equities into small-cap assets, according to some analysts. Data source: FTSE Russell Indexes, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

What Market Volatility?

Consumer confidence climbed to 130.8 in February to its highest monthly level since November 2000, according to the Conference Board. Optimism about the economy and jobs apparently helped consumers overcome the sharp fall in equity markets earlier in the month, the report said.

”Despite the recent stock market volatility, consumers expressed greater optimism about short-term prospects for business and labor market conditions, as well as their financial prospects.” said Lynn Franco, director of economic indicators at the Conference Board. Consumer confidence is largely considered an indicator of consumer spending, but isn’t always a reliable gauge.  

Buyback Binge

S&P 500 companies are expected to hoard their own stocks this year to the tune of $800 billion in share repurchases, according to JP Morgan analysts. A combination of tax cuts, strong earnings and repatriation of cash held overseas by multinationals is expected to fund the buybacks. If that happens, it will easily outpace the $530 billion in share buybacks recorded last year, according to JP Morgan. Companies have already announced $151 billion of buybacks year to date.

“There is room for further upside to our buyback estimates if companies increase gross payout ratios to levels similar to late last cycle when companies returned (more than) 100% of profits to shareholders (vs. 83% now),” the analysts said in a note to clients. “Corporates tend to accelerate buyback programs during market selloffs.”

March Madness at the Office

When the NCAA Basketball Tournament begins March 13, workplace productivity could sharply decline, according to a recent study by staffing firm OfficeTeam. Workers tend to spend an average of 25.5 minutes per day monitoring the games, most of which are held during the day, by checking scores and team rankings, and then chatting about them with fellow office workers.

But employers should just let them, the study says. “While employers may worry about events like March Madness being a distraction in the office, allowing workers to enjoy sports-related activities for even a few minutes can be time well spent,” Brandi Britton, an OfficeTeam district president, said. “Staff will

appreciate the opportunity to bond with colleagues and return to their desks rejuvenated.”

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