“Don’t overreact,” President Donald Trump’s chief economic adviser told investors on Wednesday, when US stocks were deep in the red over worries about the administration’s plan for $50 billion of import duties aimed at China.
Wall Street seemed to take heart from National Economic Council Director Larry Kudlow’s calming words in a Fox Business Network interview during his first week on the job, and the market turned itself around. The Dow Jones Industrial Average rallied more than 700 points from the day’s low.
That trust looked misguided a day later, when Trump - seemingly unbeknown to Kudlow - said he had instructed an additional $100 billion of tariffs to be imposed on Chinese goods. Equities swooned again, with the Dow dropping roughly 600 points.
It wouldn’t be the first time that traders and investors got caught out by a seeming 180-degree turn on Trump policy, but Wall Street may have to get far more selective in terms of which statements, and from whom, they listen to.
“More typically, there’s a lot more cohesion in the messaging between the White House and the markets,” said Nicholas Colas, co-founder of DataTrek Research. “Certainly this administration is taking an entirely different tack. It’s been much more volatile in trying to understand what they’re trying to tell us.”
With rapid turn-about in the White House a regular occurrence, investors have made costly decisions based on the words of a rotating door of advisers and policy makers.
Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, said there was some “good cop, bad cop action” between the President and advisers.
“Obviously you listen to them both and you hope cooler heads eventually prevail,” said Tuz. “It makes you sit on your hands a little bit more and not make any decision that might come back to bite you should these tariffs really sink in.”
A similar to-and-fro has played out with the dollar. US Treasury Secretary Steven Mnuchin said in January that he welcomed a weaker currency, Trump said he wanted to see a strong dollar, and then Kudlow in March said he would like the greenback a “wee bit stronger than it is currently.” The dollar got whipsawed.
Noise begets volatility
While long-term investors may be finding navigation tricky, the higher volatility that the remarks on trade have produced could be benefiting those traders that have short-term positions on higher volatility.
“I don’t think you really want to rearrange portfolios based on this type of volatility,” said Paul Nolte, Portfolio Manager At Kingsview Asset Management In Chicago. “This is a trader market and not an investor market.”
Wall Street’s main gauge of volatility, the CBOE VIX index, has spiked back above the closely watched 20 level.
“Any investment style that relies on volatility should now be roaring back to life, whether you’re an options trader, a momentum driven hedge fund, you need volatility to make money and you have it now,” said Colas.
As the trade rhetoric escalates, investors are trying to work out whether the endgame is a full-on trade war or just rhetoric that leads to negotiations - and that is causing some investor inaction.
If comments from China’s Commerce Ministry on Friday are an indication, then escalation could be in order: the ministry said that under the current conditions, the two sides could not conduct any negotiations.
“I’ve never subscribed to the theory that this is some position to get a better negotiating stance,” said Oliver Pursche, vice chairman and chief market strategist, Bruderman Asset Management in New York, who is not changing investment strategy on the basis of the recent rhetoric. “I’ve looked at it a little more critically and warily than that.”
Trump himself seems resigned to the notion that all the trade talk could put a serious dent in a stock market rally he has touted since his election in November 2016.
In a WABC Radio interview Friday, he said: “I’m not saying there won’t be a little pain but the market’s gone up 40-42 per cent, so we might lose a little bit of it, but we’ll have a much stronger country when we’re finished.”
Most US equity indexes, according to Reuters, are grinding through choppy corrections after falling 10 per cent or more from their record highs earlier in the year. The S&P 500 remains about 9.5 per cent lower.
Most investors are standing pat, though, despite the noise. John Surplice, pan-European fund manager at Invesco Perpetual in London, said he also had not changed portfolio positions even if policy clarity is lacking.
“It’s quite difficult to have a definitive view,” Surplice said. “Trying to pick winners is a bit tricky because if a trade war really takes hold it will lead to lower global growth which is negative for pretty much all companies.”