Trade Fears Still Stalking Street As China Announces Potential Retaliation

The weather feels like early February across much of the country, and so does the stock market. Major indices crumbled back toward correction mode Thursday as they suffered their worst day since Feb. 8 amid heightening trade war fears. Things didn’t look much clearer in pre-market trading Friday, with major indices clawing back after having been down sharply. Friday is shaping up to be a volatile session.

Overnight, stocks took a beating in Asia, with Japan’s Nikkei falling as much as 4.5% and stocks in China also finishing much lower. Stocks in Europe are also playing defense this morning. European stocks are now down about 6% year-to-date.

The big focus continues to be President Trump’s  announcement yesterday that he would impose about $60 billion worth of annual tariffs on Chinese imports. As we’ve said before, markets don’t care for uncertainty. President Trump’s plans for tariffs and China’s plans to strike back started injecting uncertainty a week or two ago, but the fear really picked up when Trump made tariffs official Thursday.

A lot of U.S. industries depend on trade, but some more than others. Industrials and materials, for instance, got hit hard by the news. Materials includes many companies in the agriculture sector, where China could conceivably strike back by importing fewer U.S. goods. On Friday, China outlined plans for a possible $3 billion in tariffs on U.S. goods, including pork, recycled aluminum, fruit and wine. That seems relatively low considering the size of the U.S. tariffs, but the Chinese embassy in Washington, D.C., said China would “fight to the end,” if the U.S. initiates a trade war, NBC reported.

It didn’t seem to help the markets too much that Trump also said tariffs wouldn’t be imposed on U.S. allies. The administration is exempting the European Union, South Korea, Brazil, Canada, and Mexico from the tariffs on metals.

By early Friday, concerns also grew about more shake-ups within the administration after the replacement of the national security adviser announced late Thursday.

The Dow Jones Industrial Average ($DJI) cratered more than 700 points yesterday, with the most severe selling in the last hour as program selling appeared to pick up amid a slide through various technical support levels, including the psychological 24,000 mark. Selling also accelerated late in the day for the S&P 500 Index (SPX), which is now down more than 1%  year-to-date.

Though the market isn’t officially back in a correction with the SPX down 8% from its late January high, many SPX stocks have fallen the requisite 10% to be considered in correction mode. Some big names are far from their highs.

Another source of uncertainty, other than trade fears, is the privacy breach affecting Facebook, Inc. FB, which seems to have taken the bloom off the rose for FAANG stocks. Those five names ((Facebook, Amazon.com, NASDAQ:AMZN), Apple inc AAPL, Netflix, Inc. NFLX and Alphabet Inc GOOG GOOGL), were market leaders not long ago. They’ve fallen off their pedestal in a big way since then, arguably leaving the market without anyone to follow.

Maybe More Fed Communication

Oil Slips, Then Rebounds

Transporting the Economy

Looking at the sector scorecard, things appeared pretty grim at the end of Thursday. Ten of the 11 SPX sectors fell, with only utilities excluded. Financials, which had achieved some buying interest after the Fed’s Wednesday rate hike, took the worst hit Thursday, falling more than 3.5%. Industrials fell more than 3% and materials fell nearly 3%. Other sectors taking it on the chin included healthcare, info tech, and consumer discretionary.

Friday’s earnings and economic calendar is pretty bare aside from early reports on durable goods and new home sales, possibly opening things up to more volatility assuming trade is thin and news is limited. This means it might be a good time to think about taking extra caution, especially with volatility already elevated. The VIX climbed back above 20 on Thursday, and that mild March volatility that settled over things the last couple weeks seems to have blown away.

The benchmark 10-year yield fell below 2.8% briefly on Thursday before clawing back to just above that by the end of stock market trading. It was the first time yields edged below 2.8% since March 1. The yield recovered to 2.84% early Friday.

On a positive note, Nike (NKE) reported earnings late Thursday that beat Wall Street analysts' expectations for both revenue and earnings per share. Sales in the company’s Greater China region grew 24%, and executives said on their conference call that the recent weak trend in North American sales appears to be reversing. “Overall, there's a strong global appetite for athletic footwear and apparel,” CEO Mark Parker said in the call. NKE shares were up nearly 5% in pre-market trading.

Another piece of potentially positive news: Durable goods orders jumped 3.1% in February, the government said Friday, well above Wall Street analysts’ expectations.

The strong durable goods reading may serve as a reminder to long-term investors not let themselves get scared into making split decisions based on recent downward action. If you're in it for the long haul, consider using these down days to do some homework and look for specific sectors or stocks that may have overshot the mark to the downside.

Though markets have been volatile, many fundamental indicators have been reflecting strength. Consumer confidence hit a 14-year high last week. The most recent jobs report blew through analysts' expectations. And this morning's durable goods number shows that people and companies haven't been shy about making significant financial commitments. It's important to keep things in perspective as you navigate these volatile markets.

Also, if you’re a long-term investor, you might want to consider keeping the following things in mind.

• Many analysts expect double-digit earnings growth once again this year.
• Company outlooks have been mostly positive, with many executives expressing optimism about the growing economy and the possible bullish impact of tax cuts.
• The economy grew 2.5% in Q4 after growing more than 3% the previous two quarters. This could be a sign that growth is returning to historic norms after a long sluggish period.
• Job growth is solid, and unemployment remains near 20-year lows.
• Interest rates remain historically low, meaning borrowing costs are still restrained even if they’re up a bit from the generational lows we saw in 2016 and 2017.
• The U.S. dollar has weakened over the last year, making U.S. products potentially more attractive to foreign consumers.
• Oil prices, while much higher than they were two years ago, remain at a moderate level where the cost of gas isn’t a major headwind for the economy.

It’s a long list, but maybe something to keep in mind if there are more days like Thursday.

FIGURE 1: TRANSIT BRAKES. The Dow Jones Transportation Average (candlestick) broke down in a big way Thursday, and some economists think weakness in the index can be a barometer for weakness elsewhere in the economy. Meanwhile, the S&P 500 Index (SPX) took a dive as well to its worst losses since early February. It’s not down about 8% from the late January record high. Data sources: Dow Jones & Co., Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

The Fed is considering holding more press conferences, but it’s unclear what the extra communication would mean for policy transparency. At the moment, the central bank holds four policy meeting press conferences per year. But Fed Chair Jerome Powell on Wednesday said he was considering adding more of the carefully watched Wall Street staples. He was also cautionary. “I would want to think very carefully about it and make sure that no one would take more frequent press conferences as a signal of the path of policy,” he said.

Still, you can’t rule out that some people might see it that way. Many investors consider it unlikely for the Fed to make moves at a “non-press conference” gathering, so adding a press conference to them all could keep people a bit more on edge.

Trade worries also weighed on oil prices Thursday, with the dip exacerbated by profit-taking and a rise in U.S. production.  This comes after oil has been on an upswing on a host of factors. A weaker U.S. dollar, concern about supplies from the Middle East and an unexpected drop in U.S. inventories had contributed to rising prices. Oil got back some of its recent mojo by early Friday amid hawkish supply talk from Saudi Arabia.

Some investors consider the Dow Jones Transportation Average ($DJT)  to be something of a barometer for broader market health. So some investors have watched weakness in that sector with a sense of alarm, according to research firm CFRA. But transportation may have turned a corner as the sub-index has pushed ahead of the $DJI on a year-to-date basis while both indexes rebound from February lows, the firm said Thursday. “While the move is in early stages and we cannot guarantee the trend will continue, we believe the index is finally catching up to the current economic environment,” CFRA said. Stronger performance in road and rail stocks as well as air freight and logistics companies has been helping the transportation average, the firm said.