Trading a trade war

05/20/19
  • S&P 500 falls to lowest low since late March on Monday
  • Tariffs: China retaliates, US postpones auto duties, considers lifting steel, aluminum taxes
  • This week: FOMC minutes, retail earnings, more housing numbers

Considering the way it started, last week could be considered at least a minor victory for bulls.

The US stock market posted back-to-back losing weeks for the first time this year amid more tariff drama, which may have peaked on Monday but continued to goose the market higher or lower—sometimes more than once on the same day.

Trading opened with the worst kind of bang, with the SPX suffering its second-biggest daily loss of the year (-2.41%) and the Dow Jones Industrial Average (DJIA) shedding more than 600 points, as China retaliated to the tariffs the US put in place the preceding Friday.1

S&P 500 (SPX), 3/27/19–5/17/19. S&P 500 (SPX) price chart. Telltale tariff moves

Source: Power E*TRADE


After a mild rebound on Tuesday, the market turned sharply higher on Wednesday—reversing early-session losses—when reports surfaced that the White House would wait six months before slapping tariffs on European cars.2 An absence of trade skirmishes, and a couple of late-season earnings beats from Cisco (CSCO) and Walmart (WMT), appeared to further cheer the market on Thursday.

Finally, on Friday, another early down day morphed into an up one amid news the US would lift existing steel and aluminum tariffs on Canada and Mexico—then slipped back into the red late in the day on reports of a breakdown in US–China negotiations.3

Despite marking its fourth-straight down week, the DJIA enjoyed its second-consecutive week as the strongest US stock index, while the Russell 2000 (RUT) brought up the rear:

US stock index performance table for week ending 5/17/19. S&P 500 (SPX), Nasdaq 100 (NDX), Russell 2000 (RUT), Dow Jones Industrial Average (DJIA).

Source: Power E*TRADE


Sector breakdown: Things were still defensive in sector-land last week, as real estate (+1.3%), utilities (+1.25%), and consumer staples (+1%) were the strongest S&P 500 sectors. The worst performers were financials (-2.2%), industrials (-1.9%), and information technology (-1.1%).

Power moves: Luckin Coffee (LK)—the “Chinese Starbucks,” if you will—notched a 20% gain when it closed out its Friday IPO at $20.38. Iovance Biotherapeutics (IOVA) jumped +36% to $15.28 on Thursday. On the downside, Overstock.com (OSTK) dropped -16% to $10.87 on Wednesday, and briefly fell to single digits on Thursday before rebounding. On Thursday, Virtusa (VRTU) fell -21% to $43.01.

Futures action: June WTI crude oil (CLM9) hit a two-week high of $63.64/barrel on Middle East tensions,4 closing Friday around $62.75/barrel. June gold (GCM9) went in the opposite direction, starting out last week strong but then sliding four straight days to close around $1,278/ounce.

After trading to a three-week low last Monday, the June US dollar index (DMM9) marched higher to around 97.82, coming close to challenging its nearly two-year high a little above 98. US Treasury prices remained firmed as interest rates eased, with the June 10-year T-note (ZNM9) nearly reaching its contract high around 124.97 on Wednesday before backing off slightly to 124.52 by Friday.

Coming this week

There likely won’t be any major surprises in it, but expect at least some short-term volatility on Wednesday afternoon when the market obsesses over every comma in the FOMC minutes. Also, more housing numbers will roll in this week.                                                                             

Monday: Chicago Fed National Activity Index

Tuesday: Existing Home Sales

Wednesday: FOMC Minutes

Thursday: New Home Sales, European Central Bank (ECB) minutes

Friday: Durable Goods Orders

Earnings heat up a little again, with high-profile retailers and a fair number of tech names releasing their numbers:

Monday: International Game Tech (IGT), Pinduoduo (PDD)

●Tuesday: AutoZone (AZO), Home Depot (HD), Kohl's (KSS), TJX (TJX), Nordstrom (JWN), Toll Brothers (TOL), Urban Outfitters (URBN)

●Wednesday: Advance Auto (AAP), Analog Devices (ADI), Lowe's (LOW), Photronics (PLAB), Target (TGT), Ctrip (CTRP), Huazhu Group (HTHT), Kraft Heinz (KHC), L Brands (LB), NetApp (NTAP), Williams-Sonoma (WSM)

●Thursday: Best Buy (BBY), Hormel Foods (HRL), Medtronic (MDT), Weibo (WB), Autodesk (ADSK), DXC Technology (DXC), Hewlett Packard Enterprise (HPE), HP (HPQ), Intuit INTU), Ross (Stores (ROST)

Friday: Foot Locker (FL)

Go to the E*TRADE market calendar (logon required) for an up-to-date earnings schedule and a complete list of splits, dividends, IPOs, and economic reports. The Active Trader Commentary also lists earnings announcements, IPOs and economic report times each morning.

[Tariffs are] not the end of the world. The market is driven a lot by how investors view what other investors are doing or are likely to do.

Nobel laureate Robert Shiller on the stock market’s exaggerated reactions to the US–China trade war .5

A solid B? Even after a couple of wobbly weeks, the US stock market is still trading at a relatively lofty historical level. As of Friday, the SPX’s 14.07% year-to-date return was bigger than the returns of all but 10 other years since 1950 at the same point in time--that's the 86th percentile.

 

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1 Reuters. China defies Trump with new round of tariffs on U.S. goods. 5/12/19.

2 Politico. White House could delay auto tariff decision. 5/15/19.

3 Bloomberg. U.S. Poised to Remove Steel, Aluminum Tariffs on Canada, Mexico. 5/17/19.

4 Oilprice.com. Saudi Coalition Targets Houthis In Yemen In Response To Oil Pipeline Attack. 5/17/19.

5 CNBC.com. Market is overreacting to trade war ‘theater,’ Nobel Prize winner Robert Shiller says. 5/16/19.

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