How Soon Should We Worry About a Trade War?

The market responded negatively on Wednesday morning to the news that China will impose reciprocal tariffs on U.S. goods to match those announced by President Donald Trump’s administration. It is important to note that these tariffs aren’t currently being imposed by either country.

For now, there isn’t a trade war — it’s more of a war of words so far. That may change in the next 60 days, but the market’s reaction to the rising threat of tariffs can be instructive.

The tariffs threatened by the Chinese were targeted at U.S. exports like automobiles and soybeans, which were clearly chosen to create a political problem for the Trump administration. This is a similar tactic to that which was used by the European Union in 2003 to end what were, at the time, recently imposed U.S. import taxes on steel.

The market’s reaction to the announcement was interesting. Industrial and agricultural firms reacted negatively to the news, but retail stocks experienced a surprise relief-rally, indicating that the threats continue to be mostly confined to industrial goods.

Even agricultural stocks clawed back a lot of their losses. Some agricultural stocks, like Tyson Foods, Inc. (NYSE:TSN), actually got a big boost, as the markets they are involved in dodged any tariff bullets.

Within a few hours of the market’s open, the major stock indexes were back to break-even, and even bond funds failed to show much stress. It looks like investors are still willing to give the benefit of the doubt to the idea that there will be a resolution to the war of tariff threats.

At this point, we would still suggest that the emerging “double-bottom” pattern on the major indexes is intact. A likely reversal won’t be confirmed until the pattern is complete (as you see in the following chart), but stable support is encouraging.

S&P 500 (SPX) Daily — Chart Source: TradingView

The tariff war is still just made up of threats right now. Uncertainty is rising, which has already affected market prices, but the longer-term effects of tariffs will remain unknown until something is implemented.

While the market is still forming a bullish reversal pattern, high levels of uncertainty will likely stall a breakout and extend the current channel. This week’s reaction to trade issues has largely been confined to stocks (so far), which is also a positive. However, if stress starts to spread into the bond market, investors should become more concerned about a support break.

You can learn more about identifying price patterns and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.

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