For weeks now, the market has been trading on tariff headlines.
Monday last week saw one of the wildest intraday swings in the S&P 500 over false reports that President Trump was considering a tariff pause.
When that fake story became real on Wednesday, the stock market enjoyed one of its strongest days ever.
In percentage terms, the S&P 500’s 9.5% gain on the day was its best performance since the financial crisis in 2008. The Nasdaq’s 12.2% gain was its best percentage performance since the heights of the dot-com bubble.
And while it was “only” the Dow Jones’s biggest move since March 2020, it still ripped nearly 3,000 points higher, a 7.9% gain.
The S&P finished the week nearly 11% higher than its Monday low (with plenty of swings along the way).
But rest assured, that will soon be forgotten as the market moves on to the next headline. That’s why it’s vital to base your trades on something more substantial…
Caught Out
The problem with trading off headlines is that you’ll be caught out eventually…
We could see a sudden policy reversal from the White House. Or an unanticipated move from the countries we do business with. Not least of which is China…
This is a heavyweight fight between the world’s two most dominant economies. And it still has a long way to go.
On the U.S. side, this week will be all about potential tariff exemptions on some electronic goods like smartphones and laptops. (Of course, President Trump has since warned that there might not be an exception.)
And China is ratcheting up its suspension of rare earth minerals and magnet exports. These are critical to U.S. industries ranging from microchip manufacturing to weapons systems and aerospace.
Chinese companies wishing to export many of these minerals will now require a special license from the government.
This all seems chaotic enough. But you can bet that a week from now, the story will have moved on to something else.
So if you get pulled into the market on a false relief rally, you could be kicking yourself if things suddenly turn south.
That’s why you need to approach this market from a different angle.
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Back to Basics
Whatever the headline is today or tomorrow, eventually the market returns to the basics.
Think about growth, revenues, and earnings – and valuation multiples like the price-to-earnings ratio.
In addition, investors need to hear from CEOs and their boards about their prospects. How are they planning for the future – especially around tariffs?
That’s why the reporting season that ramps up this week is crucial for investors. After weeks of nonstop noise and speculation, we’ll finally hear how companies are faring.
Among the stocks I’ll be watching closely are Netflix (NFLX) and Amazon (AMZN) – on top of retail sales data.
Personal consumption is responsible for around 70% of the gross domestic product (GDP). So I’ll be looking for signs that spending is starting to slow.
Beyond that, I’ll watch economic indicators… particularly around jobs. Weekly jobless data comes out every Thursday. It can provide an early warning about the economy if its numbers start to creep up.
The key is to look for real clues about how the economy and stocks are tracking. Don’t let headlines lead you astray.
Because the fundamentals ultimately determine where things are headed from here.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict