President Trump’s tariff threats have boosted stock market volatility, but not by much.
Despite some relatively large intra-day swings, traders have taken tariffs in their stride.
This may be due to the lack of much follow-through, despite all the bluster, coupled with the popular view that deals will be done thereby ensuring that neither the US nor the global economy as a whole takes a hit.
Focusing on the NASDAQ 100 for a minute, the index posted a significant record closing high in mid-December.
It pulled back sharply after that, with the ‘hawkish’ US Federal Reserve monetary policy meeting acting as a catalyst for some hefty profit-taking.
This was when the Fed cut rates by 25 basis points, as expected while indicating that it was in no rush to loosen further.
This seemed reasonable given that inflation had ticked up since the summer, while the underlying economy was robust.
The low unemployment numbers and the impressive earnings growth across S&P 500 constituents gave no reason for the Fed to goose risk assets any further.
The US central bank could be criticised for cutting rates as aggressively as it did, starting in September with, what many believed, was a thoroughly unwarranted 50 basis point cut.
It appears that members of the Fed’s FOMC got freaked out by a couple of disappointing Non-Farm Payroll numbers, which were subsequently revised higher.
Given that Fed members are always banging on about ignoring individual data points in favour of studying the underlying trend, this ruffled some feathers.
Some observers even suggested that the rush to cut rates so aggressively ahead of the Presidential Election implied some political motivation.
But the bottom line was that most market participants were desperate for lower rates, including Donald Trump.
And, similarly to the same time in 2023, most anticipated additional cuts throughout the following year.
December’s Fed meeting gave a strong warning that it wasn’t to be, and stock markets acted accordingly.
The bulls backed off on concerns that without easier monetary policy, equities could be in for a rocky year.
Since then, the NASDAQ and the S&P 500 have been consolidating in fairly wide ranges.
Sentiment wasn’t improved by the threat of President Trump’s tariffs. But a solid fourth-quarter earnings season has helped to steady nerves.
And so far this year there’s been a broadening of interest beyond the mega-cap ‘Magnificent Seven’ into smaller corporations with less expensive valuations.
So, the S&P 500 and NASDAQ 100 continue to consolidate, with both trading near their respective all-time highs.
Looking at their daily MACDs, neither index appears particularly overbought.
Can they break out from here to new all-time highs?
It’s certainly possible, but then what?
There are concerns.
The tariff issue could get worse from here, rather than better.
And what if Trump’s insistence on bilateral talks with Russia to end its war with Ukraine backfires?
Inflation is picking up again, so it looks as if the catalyst for lower interest rates will be an economic slowdown rather than falling inflation.
That wouldn’t be the kind of environment in which equities perform well.
Recent history suggests that these are all factors that investors will happily ignore, preferring the mantra that: ‘Stocks always go up’.
Could that belief be about to be tested?
(David Morrison is a Senior Market Analyst at Trade Nation. Views are his own.)
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