Stocks are trading more than 1.5% lower on Monday following the White House’s announcement of tariffs against Mexico, Canada and China with more likely on the way against the EU.
President Trump imposed 25% tariff on imported goods from Canada and Mexico (10% for Canadian energy) and 10% for China. Canada responded quickly with retaliatory tariffs while Mexico and China are vowing to do the same.
the last significant instance of the U.S. imposing 25% tariffs was during the Trump administration in 2018. Those tariffs were particularly notable on $200 billion worth of Chinese goods as part of the U.S.-China trade war.
The 2018 tariff announcement resulted in an increase in short-term volatility for stocks. Initially the S&P 500 dropped 3% initially followed by investors stepping in to buy the dip on stocks as the bull market continued.
Those tariffs against China were more targeted with only $50 billion of goods affected. This weekend’s announcement affects $200 billion of good initially with that number assumed to move higher.
Consumers and investors are reacting negatively to the tariffs as concerns of inflation and an economic slowdown are on the rise.
Last week, the Fed held rates steady as the White House prepared its plan for tariffs. The Fed expressed the need to not lower rates in case the imposed tariffs resulted in higher prices for food and manufactured products entering the country.
Stocks were able to continue their move higher, despite the market’s desire for additional interest rate cuts, as last week’s large cap technology earnings results kept investors engaged.
That’s changed over the weekend.
Investors are now dealing with a new level of uncertainty, which is almost always bad for stocks. Uncertainty and fear are the two emotions that result in fast and aggressive selling patters as investors would rather hold cash in these situations rather than weather the volatility storm.
Last week I wrote about the new bull market trend in Gold, this trend is the results of some investors getting ahead of the tariff curve as they look to gold as a hedge against market volatility.
Over the weekend, Bitcoin dropped 11% to its lowest price around 91,000. The massive selling move captures the essence of what we are likely to see through this trading week, a migration to the sidelines for speculative investors.
Bitcoin has turned into one of the best indicators of investors sentiment over the last two years. Rallies in Bitcoin have almost always been good for stocks as higher bitcoin prices indicate increasing risk appetite from investors.
Conversely, fast selloffs or crashes in Bitcoin prices have triggered the same for stocks as investors look at Bitcoin as the “canary in the coalmine” for investor risk.
Bitcoin has been trading in a range that has been bound by a lower price level of $90,000. This is the price that investors should be watching closely. A shift below $90,000 for more than two days will signal that the market is set to see a large correction of 10%-20% as investors’ attention turns from the earnings season to Tariff turmoil.
For now, as investors try to assess the timeline and damage of the new tariffs, there are at least three sectors that will see heavier effects of the shifting trade policy.
Just ahead of President Trump’s inauguration, the Biden Administration increased trade restrictions of certain semiconductors with China. Last week, the Trump administration announced that it is considering increasing those restrictions even more.
The VanEck Semiconductor ETF (SMH) began trading more than 3% lower on Monday morning as the technology ETF moved below its 200-day moving average.
The semiconductor industry has been trading in neutral trends as investors struggle to rationalize extremely high valuations. The sector is likely to trade with increased volatility and downside risk as NVIDIA’s earnings are set for February 26, three weeks away.
Tariffs against Mexico and Canada will have an immediate effect on the Automobile industry. Many of the large manufacturers, including Tesla, source parts from both trading partners as well as China and Japan.
In addition, these companies will begin to suffer at the dealership level if consumers begin to tighten their budgets due to economic uncertainty and higher inflation rates.
GM and Ford stocks are already in bear market trends as their shares trade below short- and long-term technical trendlines.
General Motor’s earnings, while better than expected, failed to move the company’s higher as higher interest rates are shifting consumer sentiment away from larger purchases like automobiles and housing.
Investors should expect that the next few weeks sill include a wide range of announcements from all the countries involved as the situation remains incredibly fluid.
It is widely expected that the White House will negotiate with Canada and Mexico to move the issue forwards as this weekend’s announcement was more of an attention grabber to make all countries take the administration’s position seriously.
An elongated period of back and forth by the heads of states will cause investors to wear thin of the uncertainty and begin moving to “higher ground” safe harbor stocks, though many of the normal names like Proctor & Gamble (PG), Colgate (CL) and other consumer staple companies have major operations in the countries targeted by the new tariffs.
We will update further on Wednesday with an in-depth look at what investors should expect from the major sectors of the market and how to position accordingly.