After several instances of the bears knocking down stock markets for a couple of percent followed by the bulls spurring a recovery, on Monday, it was an all bear show.
After Donald Trump vowed to increase the tariffs on Chinese imports from 10% to 25% a week ago Sunday, everyone knew that the Chinese would retaliate with a tariff escalation of their own. Throughout last week, we had several downtrends of significance, where the market gave back around 2%, but they were followed by a rally which recovered all or most of the temporary move down. Seeing this inspired confidence that we would be able to handle this escalation of the trade war with minimal damage perhaps.
Monday brought us the news that China had indeed fired a shot of their own by raising their tariffs on certain American imports from 10% to 25%, but that could certainly have been worse. The Americans are slapping 15% more on $200 billion worth of imports, while China is only escalating $80 billion, and that’s actually a good sign.
When the response is more measured like this and ends up being significantly smaller than the shot that the other side fired, this indicates that a truce may be coming soon, and is certainly better than having China fire all their guns. Trump is waiting on applying this tariff rate to $325 billion more in imports, so perhaps China does not want to upset him too much and perhaps make it less likely a further escalation will happen.
Trump may be a lot of things to a lot of people but he is a pretty sharp negotiator, which he used to build his empire and is now looking to turn this talent on further building the American empire. From a higher view, none of these latest moves should really concern us if we are rooting for a deal to get done, as this may very well just be part of the process, part of the dance prior to the event.
Stock markets aren’t seeing it this way, and the selloff that we saw Monday has taken us to the point where investors are no longer buying these dips, or at least haven’t done so with this one yet.
Of all the days recently that trade worries have hammered the market, Monday was the one that should be concerning us the most, because we didn’t see the buyers this time step in and this one looks like it could go on for a while, not that it necessarily will.
The Market Now Sits at a Crossroads
We are at a more critical juncture now, where we have seen the worst month of May in almost 50 years, both sides have fired their guns so the news is in, and we now wait to see which side the momentum is on right now.
All along this year, the momentum has been decidedly on the bullish side, and each dip has been made up for. For the first time, it’s not so clear at all that we will see this again, at least until we see some good news on the trade front.
While that might not come for a while, we have at least seen even the most insignificant positive news push back against the selloff, but with these tariffs now higher on both sides, this will be tougher to do.
The market doesn’t really care about the U.S. increasing tariffs, because this is the blunter end of the stick. China putting their tariffs up is what American investors are really afraid of. The reason is that this is designed to reduce sales of the companies that they own stock in, which is bad for business, and what’s bad for business is bad for stocks generally.
It only takes the perception of this to get stocks rolling down the hill, as with stocks, the perception doesn’t just mirror the realities that we expect, the perceptions actually are the reality. Concerns, worries, and fears are what are putting down prices now, even though the effects of these higher tariffs won’t really make it on the balance sheets of companies for a while now. These concerns are plenty powerful enough to drive us down several percent, and the tech heavy Nasdaq, loaded with companies that this matters to, led the way by declining 3.41% on Monday.
We are now down about 5% on average since Trump first drew his gun a little over a week ago, and while we have had several pullbacks this year of this amount, this one appears to have a lot more potential to it.
Newly minted Uber, the most heralded IPO the market has seen in years, took a particularly big hit on Monday where it lost over 10%. Uber is now down over 17% in just two trading days, and while this stock was already on very shaky ground fundamentally, starting its life during this trade war escalation was not very good timing at all.
Uber’s main competitor Lyft, which had a head start on this race downhill, fell below $50 and is getting near the target price that the most bearish analysts set for it at $45. Both of these IPOs merited all the excitement that was built up in anticipation of these new entrants to the market, but this excitement was more like the feeling you get in the pit of your stomach after you realize you made a big mistake, and investors in both should be feeling an abundance of this right now.
When your stock doesn’t move up that far when other stocks are, when the other stocks go down, these are the ones to really watch. The big hope, short term anyway, for these two urban taxi companies was that a market wave that raises just about all boats will raise them as well, but if the tide goes out instead, the undertow ends up taking down stocks like this quite a bit lower than they would otherwise go. This was clearly the case Monday for Uber and Lyft.
The News is in, But How Much Did This Weaken Overall Confidence?
When news gets released, most of the effects are felt that day, and then this particular news item gets digested and we move on. The real worry with this one is that the bad month we’ve had already may have turned the tide enough that we may go further down based upon momentum alone, meaning all this would have more lasting effects.
The pullback in the final quarter of 2018 was of this sort. Once the market lost a certain amount, a cascade of negative momentum emerged, where more selling was met with even more selling.
When people lose confidence, they ask less for their stock, and people who want to buy it will lower their bids as well. This alone can create momentum and that’s actually what market momentum is, the changing perceptions of the market participants.
Market confidence has been waning this month already, and each time we drop a percentage or two, it gets reduced further. The confidence level of the big investors, the ones that come to the rescue of bull markets during pullbacks, matters the most here, and they sat on the sidelines Monday and mostly just watched the ugliness unfold.
We did see a mid-afternoon rally Monday though, where almost 200 Dow points were recaptured for a time, but we gave most of that back in the final hour. After the initial run downward, we at least saw the sides battling it out, even though in the end the bears clearly emerged the victors.
What we really need to see here is no more damage for a while, where we end the week a little higher than Monday’s close and then look to repair it further next week. Even a flat period would be helpful, as this would put some distance between the current selling momentum and the next wave.
Should we end the week several percentage points lower than Monday’s close, this may not be a good sign at all. While this does not mean that the pullback will continue beyond this, it definitely increases the chances for it.