Tariffs don’t just – boom! Rock the market. There must be a condition precedent.
We’ve seen it before with the Federal Reserve. The Fed says, “We’re hiking rates.” Stocks crater. But behind the scenes, money had already moved.
It happened in late 2021. I made my worst trading mistake. On Jan 4, 2022, I left for a sailing trip in the Caribbean with Broad Sentiment peaked at 6.7 on a 10-point scale (you public companies and traders know our measures for Demand and Supply).
Supply was rising rapidly, too. Peaked Demand about to fall, Supply rising? Get out of the way.
The Fed had not yet signaled rate cuts. I had a position in NFLX. I thought, “I should sell this.” I didn’t.
And it got clocked, the market tumbled, and that was the peak for equities until recently. In fact, it remains the peak for a large swath of stocks.
(By the way, you can join the live Demo Thursday at Market Structure EDGE for free and hear our views on what’s next for equities.)
Now, take a step back and think logically. Donald Trump has been talking about tariffs for going on ten years. There isn’t a sentient being on the planet who shouldn’t know that it’s his preferred trade-policy tool. Anybody with sense would be prepared.
And money has been. The shift in macroeconomic risk-management happened at December options-expirations (around the 18th), when we had the biggest volatility event in SPY on record, so far as I can tell.
That was the canary warbling in the coal mine.
For stocks to fall violently, market structure must accommodate it. Friday, Feb 28, when stocks soared into the close with month-end options-expirations, the canary exited the coal mine for safety’s sake.
I told our EDGE users early Monday before the stock market opened that it was a one-day event with a probable consequence that the parties forced to buy would have to turn around and sell things.
And stocks caromed. The Nasdaq nearly corrected, down 9.8% by Tuesday’s close.
Machines, not humans, read “tariffs!!!” and scream stocks lower. The market is stuffed with automated trading systems designed to respond to real-time conditions.
Our stock market depends on a delicate market-making balance among stocks, ETFs and options. The balance is maintained by participants like Citadel (top 25 holder of US equities, mainly via puts/calls, largest consumer of retail order flow, largest US equities market-maker), Susquehanna (top 25 holder of US equities via puts/calls, largest global options market-maker) and Jane Street (top 25 holder of US equities via puts/calls, largest ETF market-maker).
When that ocean of stuff starts rocking and rolling, things break.
Here’s what happened. Month-end options expired February 28. The month was violent thanks to precedent global risk-management (responsive to tariffs? Well, responsive to change for sure.), with average volatility in S&P 500 components soaring more than 50%.
Counterparties made index investors square with the benchmarks Feb 28 but lost money and sold Monday and Tuesday (you can see that in plunging Financials performance).
As to the economy that the Atlanta Fed’s GDPNow model shows in 3% potential contraction in Q1, that is a CONSEQUENCE. Not a reaction.
Go look at government spending as a proportion of GDP that past two years. It’s a staggering spending outlier versus the entirety of the historical data set at the Bureau of Labor Statistics and Bureau of Economic Analysis.
The previous administration juiced the GDP with your money. Reality is something considerably less.
And a word on tariffs. They are only inflationary where the parties involved have the same standard of living. If I make something costing $10 here, and so do you in Finland or wherever, and a tariff is imposed on your product, people will buy mine because yours now costs more, not the same.
But if I’m in Bolivia making the product for $5, and a tariff of $3 is imposed on me, now consumers have the choice of paying $8 for the Bolivian-made product or $10 for the American-made one.
If they buy the American version, we create jobs and more products. The price might come down (volume plus distribution equals improving margins and pricing flexibility to expand markets).
My cattle-ranching dad told me in the 1980s that under NAFTA, if it were implemented, cattle and crops would shift south of the border and small towns would fill up with welfare recipients.
That happened.
Do we want cheap Argentinian beef, or American jobs? Decisions.
Back to the stock market, since Dec 18, Broad Sentiment has averaged 5.0. That’s not a Momentum market, it’s a Low Volatility market. The problem with that is Tech is the biggest part of the market and Tech is momentum.
Could that mean a bear market? Join us Thursday and we’ll share some data. And here in Colorado, the bears are up. They’ve emerged from hibernation, a sign spring is springing.
