US President Donald Trump. (Photographer: Al Drago/Bloomberg)

It's a Lot Easier to Tweet-Torture a Market That Has Rallied 18%

(Bloomberg) -- Four months ago, as equity investors were suffering through the worst December since the Great Depression, Donald Trump held his tongue on trade. Now that month is a memory and the president’s hard line is back.

Coincidence? Perhaps, though everyone knows Trump knows about the near-miraculous rebound in equities -- he tweeted about it two weeks ago. Flash back to the Christmas bottom, when key economic advisers were campaigning in the White House for a quick resolution to the trade war with China to help markets recover.

Futures on the S&P 500 were down 1.6 percent at 9:08 a.m. after Trump threatened to ramp up tariffs on Chines imports. A decline of that size could be framed as either the third worst of the year for those contracts, or less than one-tenth of their 2019 gain. Another perspective that may be of interest to Trump: It’s less than a third as big as the hammering suffered in Chinese shares Monday.

“There’s an element of saying ‘the market has rallied this year’ and the U.S. administration saying ‘that’s a sign of strength in the U.S. economy, so we can be a bit more forceful right now’” with China, said Kerry Craig, a global market strategist at JPMorgan Asset Management in Melbourne.

Yet with the rally itself driven in part by expectations of a trade deal, the risk is that the tariff threat “unwinds anything the U.S. might have been playing on,” Craig said.

No modern president has been as direct as Trump in the importance he places on American equities. Go back no further than last month, when he renewed his campaign for Federal Reserve monetary easing with a tweet claiming the stock market would have been much higher. In early March, he said that “you’re going to see a very big spike” in stocks once trade deals get done.

It's a Lot Easier to Tweet-Torture a Market That Has Rallied 18%

True, Trump effectively kicked off the trade war back when U.S. stocks had just gone through the “volmageddon” unwind last year. But the American economy was just starting to get a kick from tax cuts at the time, so there was support from other areas. And that economic good cheer helped U.S. equities outperform the rest of the world during the summer of 2018 as the trade war raged on. Chinese shares in particular did poorly, by contrast.

Trump even crowed in an August tweet that “our market is stronger than ever,” while China’s had tumbled, weakening its bargaining power. That confidence evaporated during the rout in U.S. benchmarks seen in October and, with even greater vehemence, December, when the president blamed the Fed for having hurt both the economy and markets with its tightening campaign. The S&P 500 slid 14 percent that quarter.

Supporting Pillars

The Fed’s pivot to a patient stance on interest rates, and a pledge to halt the contraction in its balance sheet in coming months, has provided part of the lift for stocks, which saw Wall Street notch fresh records last week. Also helping: strong earnings, with about three-quarters of S&P 500 members reporting for the January-to-March period beating consensus expectations, according to data compiled by Bloomberg.

Those two pillars could still help limit declines in American equities. The 1.8 percent slide in futures on the S&P 500 Index as of 3:18 p.m. Hong Kong time was a fraction of the 5.6 percent plunge in the Shanghai Composite. But all bets could be off if the trade deal investors had anticipated as soon as this week proves beyond reach.

“Now that Wall Street is at record highs, he has some leeway to threaten again,” Stephen Innes, the head of trading at SPI Asset Management, said of Trump. “He’s willing to shave off some equity market gains to make that happen.”

Innes added that “ultimately, after this clear-out, some attractive levels will be there for the taking.”

That may be all the more true if the slide serves as a way station to a trade deal.

“The most likely outcome is that a deal will still be done,” said Arthur Kroeber, the head of research at Gavekal Research. “The main reason is that global markets have priced in a deal, so a failure of the talks will trigger a massive sell-off,” he wrote in a note to clients. “The odds still favor an agreement in time for Trump and Xi Jinping to sign it ahead of the G-20 summit in Osaka on June 28.”

©2019 Bloomberg L.P.