Stocks closed lower on Tuesday, in a session that offered a taste of the volatility that dip-buyers will likely face if trade tensions between the US and China keep rising.
The S&P 500 ended down 0.2%, after a series of trade-related headlines sent it careening from a 1.5% loss into the green, only to close lower after a social media post from President Donald Trump sapped investor confidence in the rally. The Nasdaq 100 fell 0.7%. The Cboe Volatility Index turned higher at the end of the day and was recently near 21.
With few signs that friction between Beijing and Washington will fade anytime soon, more turbulence could be a gut-check for investors employing the so-called TACO trade. An acronym for Trump Always Chickens Out, the bet seeks to take advantage of Trump’s tendency to stake out extreme positions in trade talks only to backpedal to a less drastic stance.
The strategy worked in April, when stocks plunged after the US unveiled tariffs on Liberation Day only to eventually rip higher as Trump showed flexibility on his trade threats. This time around, the S&P 500 remains 1.4% higher from lows hit on Friday, as tensions between the US and China began their latest spike higher.
“The last week has been a tug of war between bulls and bears on trade uncertainty, serving as a reminder of April’s volatility,” said Nationwide’s Mark Hackett. “The buy-the-dip instinct remains strong, both with Monday’s recovery from Friday and today’s intraday rebound. Each time the strategy works, investors are emboldened to continue the practice.”
Stocks tumbled at the open on Tuesday after China placed sanctions on five US units of South Korean shipping firm Hanwha Ocean Co. and threatened further retaliatory measures on the industry — the latest in a series of tit-for-tat moves in its trade fight with the US.
Later in the day, US Trade Representative Jamieson Greer told CNBC that Trump was still set to meet his Chinese counterpart Xi Jinping, bolstering hopes that the two countries could eventually work out a deal and sending markets higher.
But the day’s rally ended after Trump said on social media he might stop trade in cooking oil with China, injecting fresh tensions into the relationship between the world’s two largest economies.
“At a high level both President Trump and President Xi seem to be trying to feel each other out, especially ahead of a potential meeting between the two, where I imagine they will bargain using a lot of these chips,” said Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute.
The trade tensions come with equity valuations looking increasingly stretched following this year’s rally. A record share of global fund managers said artificial intelligence stocks are in a bubble, according to a survey from Bank of America Corp.
While worrisome from a market standpoint, Samana does not see this being enough to change the positive tailwinds stocks have recently enjoyed, including excitement over artificial intelligence and expectations for a rate cut from the Federal Reserve.
At the same time, earnings season kicked into full gear on Tuesday, with several of America’s “big six” banks reporting. Wells Fargo & Co. had its biggest gain since the Trump election win after raising a key profitability metric following the Federal Reserve’s removal of regulatory restraints. Citigroup Inc. advanced as the bank beat revenue estimates across all five of its major business lines.
However, JPMorgan Chase & Co. fell despite a solid quarter, with some analysts noting that any upside may already be reflected in the stock’s strong valuation. Goldman Sachs Group Inc. dropped despite broadly positive results, with a slight miss in sales and trading revenue knocking shares.
“Despite some glittering headline numbers from the likes of JPMorgan Chase and Goldman Sachs, Wall Street hasn’t been in a celebratory mood,” said Danni Hewson, head of financial analysis at AJ Bell. “This comes as concerns about building trade tensions with China have forced investors to shun risks.”
XTB’s Kathleen Brooks noted that Goldman, much like JPMorgan, trades at a slightly higher multiple compared to peers.
The weakness in Goldman’s shares “suggests that lots of the good news was already priced in. However, the strength of the results suggest that the downside is not justified by the fundamentals, and any selloff could be temporary,” she added.
Among other stocks, Albertsons Cos Inc. had its best day in more than four years as the grocer boosted its annual earnings per share guidance. BlackRock Inc. rose to a record high after the firm’s assets under management met the average analyst estimate. Domino’s Pizza Inc. rose as the company posted better-than-expected quarterly results, fueled by demand for promotions and stuffed crust pizza.
Written by: Joel Leon, Alexandra Semenova, and Natalia Kniazhevich @Bloomberg
The post “US Stocks Close Lower After Volatile Session Tests Dip Buyers” first appeared on Bloomberg
