The Market Is Still Range Bound

Stocks had a poor day on Tuesday as the S&P 500 fell 0.64% and the Nasdaq fell 1.02%. The Nasdaq was hurt by Qualcomm (QCOM) which was down 5% because the merger with Broadcom (AVGO) was struck down by President Trump on Monday night. I still think the market is stuck in its range. At this point, most movements don’t impress me even if the market moves by more than 2% in a day. Nothing matters until the market makes a new high or a new low. My statements in January that the stock market was having a full year’s worth of returns in 3 weeks look accurate as those gains were temporarily repealed. They will come in much slower.

At some point in the first half of the year, the market should pass the all-time high. The correction in February was healthy because it prevented stocks from becoming in a bubble. While some investors think stocks are in a bubble now, the reality is until margins and earnings fall, stocks will continue moving higher. However, at January’s pace, even double digit earnings growth couldn’t keep up with returns. In that case, stocks could have crashed without a recession or earnings weakness because stocks could’ve looked expensive on a forward earnings basis.

White House Causing Uncertainty

President Trump’s Secretary of State, Rex Tillerson, was replaced by Mike Pompeo who is regarded to be a protectionist. This is on the heels of the steel and aluminum tariffs. Adding to that tariff, Trump is planning to get tougher on China, particularly with regards to allegations of intellectual property theft. Europe and America could have had a joint effort on this, but the water has been muddied now that the U.S. has implemented a metals tariff on Europe. China has a $375 billion trade surplus with America, which Trump wants to whittle down.

It was reported that Trump’s aides brought him $30 billion worth of tariffs on China, but Trump wanted more, so it was raised to $60 billion. It’s tough to say what this means for the market until we get more details, but it’s safe to say this could be a near term negative catalyst for the stock market. I don’t think stocks will crash because this isn’t as much of a shock as the metals tariff was. There’s no need to jump to conclusions about a trade war and Smoot Hawley level tariffs. There’s no reason to get squeamish until the Chinese act in a significant retaliatory manner to these actions. The geopolitical aspect of this is extremely important because it appears Trump wants to pressure China to strongly encourage North Korea to de-nuclearize. The situation will come to a crux when Trump meets with Kim in the next 2 months.

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