Yesterday was a wild one in the markets and there is more volatility ahead. The S&P 500 started the trading day off down about 1.1%. Investors started off the day fearful that the US-China trade conflict would escalate into a full-blown war. China’s rapid and significant reprisal against President Trump’s tariffs spooked markets.
However, the White House tamped down the fear later in the day by issuing statements soothing market fears. Director of the Economic Council, Larry Kudlow, went on television to clarify that Trump’s tariffs might not even go into effect.
After that, the ADP employment report that showed private sector employment surged. Indeed, companies hired a hefty 241,000 new employees in March. The ADP results easily crushed the expectations of 205,000 new jobs added.
The markets were then off to the races. The S&P 500 closed the day up 1.16%. The intraday swing was a wild 2.26%.
Buckle up, more volatility ahead
The stock market will get pulled in different directions in the coming months. Earnings season is about to start next week and expectations are high. Indeed, analyst forecasts show earnings will rise by up to 18% in the coming quarter. That will put strong upward pressure on prices.
Conversely, the Trump administration is unlikely to abandon its trade dispute with China. Indeed, President Trump has time and again vowed to fix America’s yawning trade deficit with China.
The tariffs he slapped on China is just the first formative step towards that goal. And despite what other White House officials may declare, it is unlikely President Trump will drop the issue at the first sign of trouble.
The United States had a massive $376 billion trade deficit with China last year. Moreover, much of this deficit is due to Chinese unfair trade practices.
For instance, China has used currency manipulation, wage suppression, and government subsidies to boost their exports. At the same time, the Chinese government has used import restrictions to limit US imports.
These unfair trade practices need to be addressed. So it is unlikely President Trump will drop the China trade dispute anytime soon. That is a powerful drag on the stock market.
The combination of rising earnings and a looming trade war will continue to pull markets in different directions in the coming months. Accordingly, it would be wise for investors to buckle up and get ready for more volatility ahead.