These damn dirty tariffs! The stock markets continue to tumble this week as US imposed tariffs create a negative catalyst for stock markets around the globe. Except for China, I expect a lot of negotiations will dial back the severity for many nations. Some of our trading partners like Vietnam are already bargaining with the White House as many countries depend on US exports to support their economies. It will be interesting to see how long some countries may hold out on re-setting their trade relationships.
What Now For the S&P 500?
In the meantime, we have to contend with a stock market that is plummeting. Aside from tariffs, we have to also consider that the government is going through a period of austerity after two years of 6%+ deficits and the economy needs time to absorb this change in federal spending. Not to mention there have been piles of corporate and government debt created that need to be refinanced in the next few years.
As you can see below, the S&P 500 rolled over to the downside and picked up momentum this week. The first line of support was the August 2024 low (and 38.2% FIB) which did not hold into Friday’s close. As you can see the big red candlestick on the far right is a standout in this chart and warns additional downside is on the horizon.
However, as you can see at the bottom of the chart (RSI – Relative Strength Index) we are now in oversold territory for the first time since 2022 so the odds are rising we experience a rebound soon. I would also like to point out that the 2022 top at 4511 is at the 50% FIB and that is a strong confluence of support. Since we breached the August low this week, that may be where we are ultimately are headed before a larger rebound ensues. Stay Tuned!
The private sector will be providing the markets some feedback on their overseas operations soon as earnings season kicks off next Friday. Investors will want to know if their supply chains are being disrupted and how it may affect margins.
What Are the Feds Watching?
So far, this tariff tumble is without any institutions failing or liquidity crunches. In fact, Friday had some good economic news as employment increased by 228,000 jobs, significantly surpassing the consensus expectation of 137,000 and improving on February’s figure of 151,000. The government layoffs should show up in the April report but overall nothing concerning on labor.
Bond market yields are falling while the Treasury contends with refinancing roughly $7.5 Trillion in government debt this year. This is something that will help the Fed as the market is providing lower interest rates for companies to refinance their long-term debt and don’t forget the homebuyers!
Falling yields also offset credit spreads widening so the administration may be suffering stock market volatility but the bond market is giving them a pass which will keep them steadfast in renegotiating trade policy via tariffs. All bets are off if bond yields begin to rise, however. For now it seems that the stock market volatility is last on their list or worries.
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President, Kisco Capital
