Market Pulls Back As Trade Worries Increase After Trump Comments

As the markets have been pricing in a partial trade deal possibly coming soon, they’ve helped send stocks to record highs. But that thesis is looking shakier this morning after President Trump suggested delaying signing such an economic pact until next year.

In saying that he likes the idea of waiting until after the 2020 election to put ink to paper between the nations, Trump ratcheted up investor and trader worries that the world’s two largest economies won’t be able to hammer out a partial deal before fresh tariffs are scheduled to go into effect later this month. 

Of course, the comments could be a maneuver to try to put pressure on China to sign a deal, but the market is extra sensitive to trade issues at the moment as the United States is also involved in other spats. Across the other pond, his administration has proposed tariffs on French imports. And Trump said he was restoring tariffs on steel and aluminum from Brazil and Argentina. That last bit proved a boon for domestic steel companies including U.S. Steel X and AK Steel AKS.

Keep in mind, nothing has been signed with China, so the market can abruptly reverse course if positive trade headlines emerge. With Trump in London for a NATO meeting, we’ll have to see if there’s any further announcements via tweet or administration officials on the wide-ranging trade spats. 

Manufacturing Contraction Continues

The worries this morning about the trade situation add to concerns from yesterday about the domestic manufacturing sector. 

The November Institute for Supply Management manufacturing index showed the nation’s factory sector contracting for the fourth month in a row. The reading came in at 48.1, well off the 49.2 expected in a Briefing.com consensus and below the prior reading of 48.3.

A contraction in the manufacturing sector has been a concern since the August ISM report came in below 50. Last time out, the headline reading of 48.3% was a bit better than the previous reading, but still below the 50% level, which is the dividing mark between expansion and contraction. 

While the services sector makes up a bigger portion of the U.S. economy, manufacturing still plays an important role. It seems that the trade war has had a bigger impact on some of the major industrial and materials companies than on the economy as a whole, so weakness in the ISM manufacturing numbers might weigh more on those sectors.

Construction spending was also a discouraging data point on Monday, with October spending down 0.8% compared to a 0.3% gain expected in a Briefing.com consensus. 

CHART OF THE DAY: WAKEY WAKEY. As stock indices including the S&P 500 (SPX - blue line) moved higher over the past couple months, the Cboe Volatility Index (VIX - candlesticks) spent the time catching a few ZZZs. But the VIX has awakened from its slumber in a big way—rising 18% Monday, and starting today up another 8%, as manufacturing data and worries about tariffs sapped risk appetite. But the fear gauge still remains below 20, a level seen by many as the toggle point between "risk-on" and "risk-off." Data source: Cboe Global Markets, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Staying the Course: With the construction and ISM data and the continued overhang of the U.S.-China trade war as the deadline for additional duties on Chinese goods approaches, investors apparently want to take some money out of equities as risk tolerance fades a bit. It’s a reminder that the high stock valuation levels we’ve seen recently can make the market more susceptible to sudden pullbacks.

But declines don’t mean that upward momentum couldn’t return quickly, especially if we see some kind of positive development toward a trade deal getting signed. And a brief pullback doesn’t mean you should get swayed from your longer-term investment strategy.

Consumer Spending: One bright spot in the domestic economy has been the retail sector. And indications from Black Friday and Cyber Monday suggest that segment of the economy remains strong as many people are employed, wages have been increasing, and gas prices are relatively low, increasing peoples’ disposable income. Later this week, we’ll get a fresh look at consumer sentiment from the University of Michigan, which according to a Briefing.com consensus is expected to register 96.5, close to the previous reading of 96.8.

Looking Ahead: A more closely-watched economic data point that affects consumer sentiment is also due out later in the week with the government’s non-farm payrolls report for November, when the economy is expected to have added 182,000 jobs. If that robust number comes in as expected, or higher, it could go a ways toward soothing worry about the economy brought on by Monday’s manufacturing data. And it would further play into the narrative that the U.S. consumer could remain one of the more robust pieces in the global economic puzzle.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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