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Portfolio > ETFs > Broad Market

The Stock Market Doesn’t Want a Trade War

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Last week was the worst week for U.S. stocks in two years. The Dow Jones industrial average fell 5.7%, the S&P 500 lost 6% and the Nasdaq dropped 6.5%, and some stocks and sectors did worse than that.

Facebook lost almost 14%, following news that data collected from users was used by a consulting company to support Donald Trump’s presidential campaign, without the consent or knowledge of those users.  (The consulting company was co-founded by Steve Bannon, former White House chief strategist).

(Related: Why Tariffs Are Not So ‘Tariffic’)

Apple, which collects more than 20% of its revenue from China and sells millions of smartphones to Chinese shoppers, fell 7.3%, and GE, which has been a big loser this year for multiple reasons including a Securities and Exchange Commission investigation into a $6.2 billion insurance loss that forced it to restate 2016 and 2017 income, lost 8.7%. Among sector funds, the SPDR tech sector fund fell 7.6% while the SPDR financial fund lost 7.1%.

Apple as well as other tech companies and industrial companies which either export to China or import materials from China, or do both, are under pressure from White House plans to impose as much as $60 billion in tariffs on imports from China. Fears of potential retaliation from China are impacting the shares of U.S. exporters to China.

Details about tariffs on China imports haven’t been revealed yet, but Treasury Secretary Steve Mnuchin told Fox News Sunday that Trump intends to impose them unless a deal is reached with Beijing concerning stolen American technology.

By Monday morning, optimism was growing that such a deal would be reached following a report in The Wall Street Journal late Sunday that China and the U.S. have started negotiating on ways to increase U.S. access to mainland Chinese markets.

“The big story for the markets is that we’re simply in a trade dispute, not a trade ‘war’ between the U.S. and China,” wrote Greg Valliere, chief global strategist at Horizon Investments, in his latest Capitol Notes.

The White House recently walked back the 25% tariff on imported steel and 10% tariff on imported aluminum from every country in the world that it announced a few weeks ago. Last Thursday it temporarily exempted many countries and regions from the tariffs until May 1, including the European Union, Canada, Mexico, South Korea, Australia, Argentina and Brazil.

J. D. Foster, chief economist at the U.S. Chamber of Commerce, on Friday called the steel and aluminum tariffs “a blunt and misaimed response,” and the chamber’s president, Tom Donohue, has said the tariffs on China would be “damaging taxes on American consumers.”

Last week’s steep market drop and rebound is not an unusual pattern this year, but it has led some strategists to advise caution.

Following the rout last week, Nigel Green, founder and CEO of deVere Group, wrote, “With the possibility of a Trump-induced trade war heating up, investors should review their portfolios to make sure they remain on track to meet their long-term financial goals.” He urged investors to make sure “they are properly diversified across regions, sectors and asset classes,” noting that “diversification is a key tool to mitigate potential risks and to take advantage of the inevitable opportunities that bouts of volatility present.”

Liz Ann Sonders, chief investment strategist at Schwab, also urged investors to check themselves: to “review the timeline” for their goals, “get reacquainted” with their investment plan, “revisit” their risk tolerance, and “rebalance back to strategic allocations” if a pullback materializes. She said the market is not in bear territory but “momentum has weakened.”

Sam Stovall, chief investment strategist of U.S. Equity Strategy at CFRA, said the S&P 500 will likely revisit its February low, which registered a 10% decline from its late January high, signaling a market correction. “The correction was not completed,” says Stovall.

On Feb. 9, the S&P 500 fell to an intraday low of  2,533, and on Feb. 8, it posted a closing low of 2,581. Stovall said the key level to watch now is the 2,565-2,588 range. “Any breach of this key support would likely usher in additional volatility and downside risk,” Stovall says, but he doesn’t think that will lead to a new bear market.  The S&P 500 closed Friday at 2,588.26.

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