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Markets I Escalating Tariffs Test Investors’ Faith in U.S. Growth
Hello. I'm Amrith Ramkumar, preparing you for Tuesday trading.
Futures are rising after stocks had their worst day in four months yesterday on renewed trade tensions. The latest volatility followed China's pledge to raise tariffs on about $60 billion of U.S. imports.
It's pretty quiet on the earnings and economic calendar today ahead of retail sales figures tomorrow.
Before we see if stocks can stabilize, I explain why the latest tariff
increases will test investors' confidence in U.S. growth.
Markets in a Minute
European stocks climbed on Tuesday after a downbeat session in Asia,
as investors awaited a resolution to the U.S.-China trade negotiations
following the recent escalation in tensions.
Some investors are seeking safety with tariffs rising and markets sliding.
The sharp stock-market selloff of recent days is confronting investors
with a quandary long avoided during the 10-year old bull market: riskier
assets suddenly look very risky.
Gains in U.S. stocks have made them historically expensive relative to
global equities. Economic growth remains solid, but some analysts and
investors said the escalation of trade tensions underscores the fragility of this year’s rally, which was spurred by hopes the U.S. could avoid a slowdown hitting other parts of the world.
Monday’s selling also hit shares of smaller companies that earn
more of their revenue domestically—a sign of mounting fears that
slowing growth overseas could spread to the U.S. Although some
analysts say the direct effects of higher tariffs could be contained,
many caution that the possibility of further increases will likely
continue rocking markets.
Megan Horneman, director of portfolio strategy at Verdence Capital
Advisors, said the firm has lowered stock positions in recent weeks and
increased cash holdings with the latest tariffs more likely to dent
consumer and business confidence.
“That’s where you could see a bigger impact to the economy,” she said.
The S&P 500’s Monday fall marked its fifth decline in six sessions,
bringing its drop over that span to 4.5% and paring its 2019 climb to
12%. Meanwhile, the Russell 2000 of small-cap stocks has declined 5.7%
in that span and re-entered correction territory Monday, down more than 10% from its August record.
Still, U.S. stocks fell less than global equities last week,
pushing the ratio of the S&P 500 to the MSCI AC World ex USA Index
to a fresh record of 10.4 Friday, a Dow Jones Market Data analysis of data going back to 1993 shows.
“There’s still a sense that the U.S. economy is the driver of the
global economy, that its resiliency is surprising to many,” said Joseph
Amato, chief investment officer of equities at asset manager Neuberger
Berman. The tariffs “will cost some growth, but I still think there’s
enough underlying strength in the economy to withstand it,” Mr. Amato
Even factoring in earnings of companies in the respective indexes and
their historical valuations, data show U.S. stocks are more expensive, investors say.
The trend has also held for materials sensitive to global
economic activity. The ratio of the S&P 500 to the S&P GSCI
commodities index rose to 6.7 earlier this month, near its 15-year peak
hit in June 2017.
The tech-laden Nasdaq slid
3.4% Monday, its worst day since Dec. 4 and eighth drop in the past 10
sessions. The index is now 6.3% below its May 3 record and at its lowest
level since March 27.
S&P 500 companies that generate more than half their sales outside the U.S. are on track to report a 13% decline in earnings
from a year earlier and 0.2% sales growth for the first quarter. That
compares to profit growth of 6.2% and revenue growth of 7.3% for
companies that generate more than half their sales inside the U.S.,
according to a FactSet analysis of data from 90% of S&P 500
companies that have reported earnings and projections for the remaining
On this day in 1997, Amazon.com went public
on the Nasdaq, offering 3 million shares at an initial price of $18 per
share. Last summer, the e-commerce giant became the second U.S. company
to hit $1 trillion
in market value on an intraday basis, and today it is valued at $897
billion with a share price of $1,822.68 even after recent declines.
U.S. import prices for April are out at 8:30 a.m. ET.
The New York Fed releases its household debt and credit report for the first quarter at 11 a.m.
The Minneapolis Fed's Neel Kashkari and Kansas City Fed's Esther George speak to the Economic Club of Minneapolis at 12:45 p.m.
President Trump heads to Hackberry, La., to visit a
liquefied natural gas export terminal and talk about energy
infrastructure and economic growth at 2 p.m.
China's industrial production, retail sales and property investment data
for April are out at 8 p.m. Economists expect industrial output growth
to have slowed following March’s strong rebound and retail sales to hold
Stocks plunged amid escalating trade tensions between the U.S. and
China. Here, a trader at the New York Stock Exchange on Monday. PHOTO:
Fear has flared up as investors brace for more market volatility. Many investors fear that the recent volatility in markets is here to stay. The VIX, known as Wall Street’s “fear gauge,” jumped almost 30% on Monday, marking its biggest one-day advance since October.
Demand for U.S. government bonds has jumped on fears of a long trade conflict. A broad flight to safer assets pushed the yield on the 10-year U.S. Treasury note to its lowest close since March, highlighting the spreading effects of the escalating U.S.-China trade battle. Meanwhile, oil dropped to a six-week low on fears the trade skirmish would cut into demand.
Uber stock’s plunge is a blemish on the IPO market. Uber’s stock fell 11%, in another setback for the highest-profile company to go public in years and threatening to cast a chill over the IPO market.
Rising rents for millennials have boosted a new breed of lender. Startups are stepping into a market long associated with payday lenders. One pitfall is that such loans might encourage some young renters to live beyond their means.
Firms are flocking to issue bonds on a tiny English Channel island. Companies selling risky debt have flocked to the tiny English Channel island of Guernsey,
which is self-governing and known for its low tax and light regulation,
in the wake of stricter EU rules aimed to make bond markets more
transparent and fair.
Fannie and Freddie are backing more mortgages of those deeply in debt. The gatekeepers of the mortgage market are increasingly backing loans to borrowers who have heavy debt loads, highlighting questions about risk as policy makers debate ways to change the system.
What We've Heard on the Street
“There is no economic landscape so perfect that policy blunders or a
reversal in public euphoria can’t ruin it—even if the considerable
powers of the Fed are eventually brought in.”
of the e-commerce company fell 3.6% Monday, their biggest one-day
decline since Feb. 1. The stock has fallen in six consecutive sessions,
its longest streak of declines since March 2016.
Take-Two Interactive: The
videogame company said it has sold 24 million if its late October
release “Red Dead Redemption 2” and that the game helped lift net
bookings to a record in the fiscal year ending in March.