(Bloomberg) -- Long among Donald Trump’s most steadfast allies, equity bulls have shown signs of revolt, with overnight trading in futures falling as much as 1 percent before paring the loss on concern over his forays into trade.
Driven since Election Day by optimism fueled by the president’s business embrace, investors find themselves in his cross-hairs as tariffs on $50 billion of Chinese imports exact a price in indexes reliant on overseas sales. S&P 500 contracts were down 0.2 percent at 7:22 a.m. in New York, pushing the weekly loss past 4 percent.
The contracts have been volatile, briefly erasing all of the 1 percent loss before again falling by 0.5 percent. Markets in Asia had no such confusion. They followed U.S. stocks sharply lower, with Japan’s Nikkei 225 losing 4.5 percent and Hong Kong’s Hang Seng sliding 2.5 percent. The Stoxx Europe 600 was down 1.1 percent.
“I’m glad Americans got those massive tax cuts because we just lost it all in the stock market,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York. “Tariffs mean a trade war and the news has the world’s investors running for the exits.”
Normally, the diverse provenance of earnings in U.S. megacaps is seen as a shield against the vicissitudes of the domestic economy. Inconveniently for Trump, who for 15 months has touted equities as a report card on his policies, it also leaves them particularly exposed to anxiety over trade.
Data compiled by S&P Dow Jones Indices show that about 43 percent of sales come from foreign countries in the S&P 500, an index that lost 2.5 percent Thursday and is down 5 percent from March 9, the bull market’s anniversary. The comparable portion is about 20 percent in the Russell 2000, which has lost a little over half as much over the stretch.
Trade angst isn’t occurring in a vacuum. Calm is being broken in equity markets that for two years registered barely a blip as steadily rising earnings, coordinated global growth and a docile Federal Reserve added $27 trillion to global equity values. Boosted by a handful of technology giants, the Nasdaq 100 recently traded at almost 28 times earnings.
“You have a market which has been vulnerable for a while,” said Jim Paulsen, chief investment strategist at Leuthold Weeden Capital Management. “You pull that together with the trade war with arguably the second most-powerful country in the world. Then you combine it with the fact that it happened one day after Fed signaled two more hikes this year.”
The thumbs down verdict in markets failed to shake the resolve of some money managers who see a tougher stance as long overdue. China announced plans for reciprocal tariffs on $3 billion of imports from the U.S., products from steel to pork, after Trump moved to order levies on a range of Chinese goods.
“Trump might not be going about it in the diplomatic fashion, but we’ve gone through a longer period of time when there was basically a whole lot of diplomacy but nothing’s changed,” said Steven Glass, a portfolio manager at Pengana Capital in Sydney. “So yeah, Trump is using brute blunt force, and it might not be the right way, but he’s doing what he said he was going to do.”
While trade is the most proximate explanation, the past few days’ declines are a continuation of almost two months of volatility that has often resisted an easy explanation. Along with protectionism, a parade of concerns has been weighing on sentiment: Facebook’s privacy travails, anxiety about Federal Reserve policy and concern about share valuations.
Dip-buyers with hearts set on a quick restoration of record highs in the S&P 500 looked poised for disappointment. After rallying as much as 8 percent from its February lows, the index has now fallen in seven of nine days, pushing market anxiety as measured by the Cboe Volatility Index two roughly twice its average level in the last two years.
“We’re still working through the correction that started in February,” Jason Browne, chief investment strategist at FundX Investment Group. “We may re-test the lows, or we may even go a little lower. All we know for now is where the first leg stopped and that we moved back up so fast we lost momentum before getting back to new highs.”
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