Tariff Rate - President Trump Ready To Raise To 25% On Friday

Tariff Rate - Stocks Fall Slightly

Tariff Rate - The S&P 500 fell 0.16% on Wednesday as investors feared the outcome of the trade negotiations with China. That slight decline masks the sharp decline at the end of the trading session where the S&P 500 fell 0.57% in the last half hour. On the day, the Nasdaq fell 0.26% and the Russell 2000 fell 0.46%. 

Usually, when trade related worries are causing volatility the Russell 2000 outperforms the large caps. Semiconductors also fell sharply at the end of the trading session as the SOXX ETF fell 1% in the last 25 minutes to close with a loss of 0.85%. I use the semiconductor industry to measure investor sentiment towards a trade deal. Lately, it is skittish as the SOXX ETF has fallen 5.81% since April 24th.

Utilities Fall & Healthcare Stocks Rise

Tariff Rate - VIX rose 0.41% to 19.4. That’s not a large increase considering the swings in the S&P 500. It didn’t rise much probably because a VIX this high implies there will be some modest declines.

Even with this decline in the S&P 500 and slight increase in the VIX, the CNN fear and greed index increased from 40 to 42 which still signals fear. With this slight increase while stocks fell, the index is closer to reality. I still think the market is closer to greed than fear though.

The worst 2 sectors were communications services and utilities which fell 0.36% and 1.38%. The best 2 sectors were healthcare and real estate. Healthcare is now the place to invest because Biden is leading in the polls by double digits and the sector isn’t hurt by the trade war.

Trade Worries Loom

Tariff Rate - Trade negotiations are going worse than expected last week. I was expecting politicians to kick the can down the road for at least a few more weeks, but I didn’t see new tariffs being implemented. However, I was wrong on the latter point. President Trump is about to raise tariffs on $200 billion worth of Chinese goods to 25% from 10%.

In the midst of Chinese representatives meeting with American officials, President Trump stated at a rally in Florida "By the way, you see the tariffs we're doing? Because they broke the deal. They broke the deal. So they're flying in, the vice premier tomorrow is flying in — good man — but they broke the deal. They can't do that, so they'll be paying." 

You can’t take something said at a stump speech at face value. But it’s clear there won’t be a deal this week. President Trump doesn’t seem too impressed with the vice premier coming to America to negotiate.

The tariff rate will go into effect on Friday. There’s almost no chance of a reversal before then. A worry for investors is if this tariff hike swings the odds in favor of an all-out trade war. Tariffs haven’t sent stocks down as much as they could because many investors believe something will be worked out.

Neither American leaders nor Chinese leaders are incentivized to wreck their own economy as a negotiating tactic. I think Trump will lose negotiating power if this goes on a few more months because he faces an election in November 2020. Something has to give in the next few months or we could be on the precipice of a major trade war which could push the global economy into a recession.

Almost Finished With Earnings Season

Unfortunately for the bears, earnings season is almost over as only 15% of firms haven’t reported results yet. Great results can’t help the overall market now that few reports are coming out. These few firms reporting solid results are overwhelmed by the negativity coming from economic reports and the trade news. 

Tariff Rate - To be clear, if the negative economic reports from April are accurate, then Q2 earnings might not be as good as most investors and analysts expect. The estimates fell too quickly in the first 2 months of 2019. They might not be falling enough now.

As of May 6th, Q2 estimates are for just 0.86% growth. While that’s not a lot, it can still be too optimistic. If you work off the premise that an earnings recession is 2 straight negative earnings growth quarters than Q2 and Q3 will need to be negative since Q1 has been positive. 

Even if Q2 estimates fall less quickly than average in May as they did in April, growth is very likely to head into the quarter negative. Since The Earnings Scout showed Q1 growth estimates at 2.29% on February 1st and Q2 estimates of 1.47% on May 1st, it’s fair to say Q2 has a better chance of having negative growth. 

However, if EPS results are beaten at an above rate average like Q1, they might not end up negative. Currently, Q3’s estimates are for 2.07% growth. It’s too early to tell how those will end up.

As you can see from the table above, with 427 S&P 500 firms reporting results, EPS growth was 6.3%. And the average surprise was 6.17%. 75% beat estimates and 18% missed them. 

The 3 year average EPS surprise is 5.26%, meaning this quarter was above average. On average 73% of firms beat estimates, so Q1 is also better than average on that metric. Sales growth was 5.45% and the average beat was 0.41%. 60% beat estimates which below the 3 year average which is 64%. It’s interesting to see how EPS growth is less than half the 3 year average, but sales growth is only 0.32% below the 3 year average.

Tariff Rate - Conclusion

The stock market could fall further in the next few days if trade negotiations go south. Even if it’s a foregone conclusion that tariffs will be raised, the negotiations still matter. Supposedly, there is only time for one meeting on Thursday which isn’t promising. 

It’s tough to say exactly what the latest issue in the negotiations are. All we know is President Trump stated China attempted to renegotiate a deal. Therefore, I can’t say with certainty where this is headed next. We only know it doesn’t look good now.  

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