Markets Holding up under Tariff Tantrum Conditions

Last Friday’s negative trading session for stocks, which all but erased any gains for the week, left a burn mark on the ever-resilient bullish sentiment that has characterized the primary trend.

Global trade matters greatly, and the prospect of a real and escalating trade war with China has made its way into the fabric of current market psychology. Let me note up front that all four major averages have held their Feb. 9 lows.

The Dow, S&P, Nasdaq and Russell 2000 remain in a primary uptrend. The extreme volatility lately has shaken out a lot of nervous money, but trading volume started to lighten up last week, signaling that seller exhaustion is setting in. China’s President Xi Jinping will give a wide-ranging speech Tuesday at the Boao Forum, where there are high hopes that he will outline market access reforms amid the trade tension.

Markets caught a huge bid last Wednesday from newly appointed National Economic Council Director Larry Kudlow’s remarks that any tariffs would take several months to implement and that there is time to find common ground to avert tariffs altogether.

What followed caught Mr. Kudlow and the market flat-footed, as President Trump threatened to impose an additional $100 billion in tariffs on Chinese imports. This was followed by Treasury Secretary Steven Mnuchin implying that “there is potential of a trade war” in his interview with CNBC on the situation. Mnuchin stressed that the objective was to rein in the trade deficit and pressure China on the decades-long practice of stealing American intellectual property.

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