The US stock market cared about only one thing this year: trade. So why were stocks so calm Tuesday following headlines about tariff delays and the signing of Nafta 2.0?
On Tuesday, The Wall Street Journal reported that American and Chinese negotiators are working to delay the December 15 duties that the United States is set to impose on Chinese imports. This next round of tariffs will hit consumer goods.
Meanwhile, Democratic lawmakers announced their support of the USMCA trade deal with Mexico and Canada that will replace the North American Free Trade Agreement.
Both developments were undoubtedly market positive, but stocks traded lackluster at best. The Dow and the S&P 500 were both off by 0.1%, while the Nasdaq Composite down by an even smaller margin.
So what’s going on?
For one, investors are fed up.
“The market is becoming numb to these trade headlines,” said Zhiwei Ren, managing director and portfolio manager at Penn Mutual Asset Management.
The ongoing trade war has left market participants fatigued in the face of new promises of fruitful negotiations or new import levies.
“Also, market participants’ positioning is light as few people are taking a big position in front of the December 15 decision,” Ren added.
When it comes to trade deals and tariff threats, “unless you see pen hit paper, don’t get caught up in it,” JJ Kinahan, chief strategist at TD Ameritrade told CNN Business.
Investors have grown more cynical with every trade headline that wasn’t followed by action, such as comments on the progress of talks. But stocks still moved in lockstep with rising and falling hopes for a trade deal.
But Tuesday’s headlines may have just lacked the surprise factor.
Tariffs have been postponed before, and the December 15 levies will hurt the US consumer like none have before. That is key, because consumer spending accounts for some two-thirds of US GDP. Hurting the consumer means hurting the economy.
“The Trump economics team is counting on the consumer to carry the economy forward as business investment still is being held back by an uncertain outlook for trade talks,” wrote Chris Rupkey, chief financial economist at MUFG, in a recent not to clients.
All this had already set the stage for a probable tariff delay.
The USMCA deal, on the other hand, was agreed back in October 2018, even though it is yet to be ratified.
Democrats are proponents of a North American trade association, and the original Nafta deal was signed by President Bill Clinton. This made it unlikely for Congress to block the passing of USMCA.
What we’re seeing in the market today “is a more prudent market reaction with people taking a breath,” said Kinahan.
After all, amid the swirl of trade news, the Federal Reserve meeting also kicked off.
While interest rates are expected to be left unchanged, investors are keen to hear the central bank’s assessment of the economy in the last months of the year, which is stealing the trade headlines’ limelight.
Regardless of Tuesday’s market reaction, trade remains the single biggest driver for the market going into the new year.
That is in part because of how binary the situation is: a trade deal would remove uncertainty for investors and give businesses the confidence to invest in their future. Global trade could rebound and the manufacturing sector could recover. Investors sitting on the sidelines would no longer have a reason not to get back into the market.
A full-blown trade war, on the other hand, would lead to more pain through tariffs, possible currency wars and likely a prolonged slowdown of the global economy.