February wasn’t a particularly good month for US equities.
The first trading day began with a sharp sell-off which saw all the US majors gap lower.
Why? Tariffs.
Just one week into his second term as President of the United States, and Donald Trump did exactly what he said he would do, announcing swingeing tariffs, not just on his old trade enemy, China, but on his neighbours to the north and south too.
Reports came in over that weekend that President Trump was preparing to impose 25% tariffs on Mexican and Canadian imports (but ‘just’ 10% on Canadian oil), along with an additional 10% on Chinese goods.
The latter was on top of the levies that he had arranged during his first term, and which were kept in place by his successor (and predecessor) Joe Biden.
The tariffs were set to kick in on Tuesday, 4th February, and the news triggered fears of an international trade war, with all combatants threatening retaliation.
Most investors had left for the weekend believing that President Trump’s tariff threats were a negotiating tactic that would never be realized in full.
And they weren’t entirely wrong. There was a small window for negotiation, and guess what?
Mr Trump ended up postponing the levies on Mexico and Canada after both countries promised to take action to crack down on illegal immigration and drug smuggling through their porous borders.
No such luck for China which was enjoying its extended Lunar New Year holidays.
The tariff postponement led to a sharp rally across US stock indices, which ultimately resulted in new all-time highs for both the NASDAQ and S&P 500 just two weeks later.
But it wasn’t to last, and equities began to slide. A strong fourth quarter earnings season had provided a tailwind for stocks. But this fizzled out after NVIDIA’s strong numbers just weren’t strong enough.
The Dow, NASDAQ, S&P and Russell 2000 limped and stumbled through the following fortnight and finished off February in negative territory.
And here we are in March and it’s all happening again.
Only this time there was no tariff delay for Canada and Mexico, while China copped an additional 10%.
With tit-for-tat measures now a certainty, investors worry that this is the start of a global trade war, particularly as President Trump said that Europe could be next.
Many economists believe that tariffs will result in another burst of inflation in the US, although those around Mr Trump say there’s no basis for that forecast.
But it seems likely that global growth will take a hit, and that is showing up in bond yields which have fallen sharply.
US equities are not taking this well, although so far the damage to European stock indices has proved minimal.
Interestingly, the US dollar has turned sharply lower, with the Dollar Index trading down to levels last seen just after Donald Trump’s election victory back in early November.
Again, this suggests that investors are less concerned about tariffs boosting inflation, and more worried about the outlook for US economic growth.
Could this mean that we’ve already seen the top in US equities, or are we about to enjoy an exceptional buying opportunity ahead of fresh all-time highs?
It’s too early to say. But the trouble, or benefit, with Trump’s second term is that volatility is back with a vengeance. And markets will once again be driven by news headlines.
(David Morrison is a Senior Market Analyst at Trade Nation. Views are his own.)
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