Over the last few days the market has set aside its worries about trade wars and started to focus on the potential for some strong second quarter earnings reports. A good report from PepsiCo (PEP) kicked things off Tuesday and on Friday morning big banks begin to report with Action Alerts PLUS holdings Citigroup (C) and JPMorgan Chase (JPM) as well as Wells Fargo (WFC) on the docket.
While the Dow Jones Industrial Average has seen its best move since early May, momentum has been lackluster and small-caps have lagged. It has been mostly index-driven rather than stock-picking action but it has kept sentiment positive and increased expectations into earnings season.
Futures are down sharply Wednesday as the Trump administration has proposed tariffs on an additional $200 billion in Chinese goods, including items such as chemicals, oil, handbags and fish. This comes on top of $34 billion in tariffs that were previously announced. There is a negative reaction to this news around the globe with many markets down as much as 2%.
While this news is not a huge surprise, as President Trump has been hinting about its likelihood, the unknown is to what degree China may retaliate. So far U.S. markets have been quick to shrug off this escalation and already this morning we are starting to see some bounce off the overnight lows.
What is key is that the market just isn't buying the narrative that the trade wars are a long-term negative. There is some concern about short-term disruptions but ultimately the market appears to believe the issue will be worked out over time and may in fact turn out to be a net positive for the U.S. economy.
Of course, the bears are painting a scenario of serious economic damage, although the market just isn't embracing that idea yet. There is some weariness over the issue but there is still a high level of hope that the Trump administration will have some negotiating breakthroughs and the market will celebrate.
The biggest danger the bears face are news headlines that some progress on trade is being made. That isn't happening yet as Trump ratchets up the pressure but the market still believes it is very likely, which is why we are not seeing sustained downside momentum.
The market has become used to the pattern of buying this sort of early weakness. There have only been a couple days in the past month when the indices have closed near the lows and every time there is a gap down open, we end up with a decent close.
Trade war worries are likely to be quickly forgotten again and the focus will turn to earnings. While the trade war headlines are going to dominate the news coverage, they really aren't having that much impact on the price action. The buyers are already looking for opportunities to jump in again.