Trade Wars Rock the S&P 500 in Week 3 of March 2018

What a difference a week makes!

Last week, we were on very firm ground in noting that President Trump’s proposed tariffs were having very little impact on stock prices, where we closed our weekly observations with the following comment:

We’re making a point of noting the major international trade-related headlines, where U.S. President Trump’s planned tariffs are certainly getting lots of attention, but through the first half of March 2018, we’ll agree with Goldman Sachs’ assessment that stock prices really aren’t reflecting much of a concern over the probability of a broad trade war. Despite what the headlines are indicating, what we are seeing so far is mostly consistent with the typical levels of noise that have historically characterized the day-to-day volatility of stock prices. We’ll continue paying attention to both trade headlines and stock prices to see if that apparent investor response continues.

That remained through through Thursday, 22 March 2018, where we observed the investors complete their transition in shifting their forward-looking attention from 2018-Q2 just over a week ago to the much more distant future quarter of 2019-Q1.

That transition marked, by our count, the fourth complete Lévy flight event for the U.S. stock market in 2018, which occur whenever investors shift their forward-looking focus from one distinct point of time in the future toward another, where differences in the change of the rate of growth of dividends per share expected at the different points of time are large enough to drive larger changes in stock prices than would be expected if they genuinely followed a “normal” random walk (they don’t!) Here’s our tally of the Lévy flight events that we’ve observed since 2018 began:

1. Shift from 2018-Q2 to 2018-Q4: 3 January 2018 to 12 January 2018
2. Shift from 2018-Q4 to 2018-Q1: 30 January 2018 to 5 February 2018
3. Shift from 2018-Q1 to 2018-Q2: 7 March 2018 to 9 March 2018
4. Shift from 2018-Q2 to 2019-Q1: 12 March 2018 to 19 March 2018

After 19 March 2018, we find that the trajectory of the S&P 500 has largely remained consistent with our dividend futures-based model‘s projection for stock prices that assumes that investors are predominantly focused on 2019-Q1 and the expectations associated with that point of time in the distant future as they make their current day investment decisions.

At least, through Thursday, 22 March 2018. On Friday, 23 March 2018, something remarkable happened to the S&P 500, where we can directly trace the impact of new information related to a trade war-related headline in prompting outsized noise event for the U.S. stock market. The following chart shows the trajectory of the S&P 500 on that day:

Here, we see that the S&P 500 showed typical levels of volatility, with stock prices hovering within about a half of a percent of its previous day’s closing value of $2,643.60.

That state of affairs lasted all the way up until 2:42 PM Eastern Daylight Time when they hit 2,632.17, after which, stock prices began trending strongly downward, dropping by over one and a half percent by the time the market closed at 4:00 PM, where the S&P 500 recorded its closing value of 2,588.26, a loss of 43.91 points, or 1.6% of the S&P 500′s value, occurring in just 78 minutes.

We’ve repeatedly observed that it takes investors approximately two to four minutes after unexpected news breaks for their response to that news to begin affecting stock prices. Since the S&P 500 began to break sharply downward after 2:42 PM Eastern time, that would put the beginning of the specific news event to which investors responded somewhere between 2:38 PM and 2:40 PM.

That event appears to be the wide publication of an Associated Press article that hit the nation’s news wires within that very narrow window of time:

Doing some quick math, China’s threatened tariffs on $3 billion worth of selected U.S. goods were sufficient to reduce the S&P 500′s estimated market capitalization by more than $393 billion.

That’s quite the scare multiple! At the very least, investors have sent a very loud and expensive message to both Washington D.C. and Beijing that a trade war is a lose-lose proposition.

And though the rest of the week’s news headlines didn’t have that kind of market-moving power, here they are, as we noted them.

Monday, 19 March 2018

• Oil dips as Wall Street dives; tensions over Iran support crude
• EU eyes 3 percent tax on tech giants’ revenue – official proposal to be released on 21 March 2018.
• Facebook shares slide after reports of data misuse

• Facebook plunge leads tech, Wall Street sell-off
• Analyst View: Tech sector selloff leads Wall Street sharply lower

Wall Street drops as regulation worry sinks tech shares

U.S. expected to impose up to $60 billion in China tariffs by Friday: sources

Tuesday, 20 March 2018

• Oil prices rise on Middle East tensions, healthy demand
• Wall Street advances on energy bump; Facebook woes continues

• Facebook data controversy drives stock to cheap levels

Wednesday, 21 March 2018

• Oil hits six-week high on inventory data, OPEC compliance, Iran worries
• Fed raises rates, signals confidence in strengthening economy

• FOMC statement from March 20-21 meeting

White House to announce intellectual property tariffs on China Thursday: CNBC

• China partially wins WTO case over Obama-era U.S. tariffs

Stocks end modestly lower after Fed hikes rates; energy up

Thursday, 22 March 2018

• Oil rises more than 1 percent as Saudi says production curbs could last into 2019
• Trump to hold off steel tariffs for EU, six others: Lighthizer

• U.S. steel shares slump on more exemptions from Trump’s tariffs

Trump moves toward China tariffs in warning shot on technology transfer

• U.S. to sue China at WTO for alleged trade violations: WSJ
• China blames U.S. for staggering trade surplus as tariffs loom
• China ‘would fight to the end’ in any U.S.-launched trade war: embassy

Stocks tumble to worst day in six weeks after Trump tariff action

• Stocks Plunge As Trade Turmoil, Credit Crisis, & Tech Wreck Loom – a more complete, succinct, doomy and gloomy view of the market, where trade was just one of the noisy elements affecting stock prices during the day!

Friday, 23 March 2018

• Oil rises as Saudi backs extending output cuts into 2019
• Fed’s Bostic sees two more interest-rate hikes this year
• Fed policymakers say they are watching trade risks closely

• Fed’s Bostic says need to wait before reacting to trade policy
• Fed may need to adjust policy framework to respond to financial shocks -Rosengren

Begun the Trade Wars Have:

• China Targets $3 Billion of US Goods in Tariff Spat

• Oh nuts! China shoppers lament tariffs on US almonds, pistachio and fruit
• U.S. pork to feel further chill from China tariff threat

Trump temporarily excludes EU, six other allies from steel tariffs

Wall Street nosedives as investors flee on trade war fears

Elsewhere, Barry Ritholtz found that the week’s positives outweighed the negatives for the U.S. economy and markets during the third full week of March 2018.

As we wrap up our summary of what happened for the S&P 500 in Week 3 of March 2018, we may very well have a new, negative noise event for investors to factor into their geopolitical calculations. Oil prices may be something very worthwhile to pay close attention to in this fourth and final week of March 2018.