Playing Hardball: Financial Markets Don't Like It

By Jerry Wagner

A couple of weeks ago, I started receiving spring training scores on my smartphone. The Grapefruit League was reborn, and baseball was being played again.

I have always loved this time of year. For many years, it was a time for my sons and brothers to venture south together on a guys' outing. It was a time to escape the snow and sit in the sun for a few days to watch a mixture of prospects and veterans get the off-season kinks out and play ball. Even today, with those trips just a bit of loving history, spring training remains the first indication that the winter is ending and that springtime is about to emerge.

In contrast to this positive picture, the financial markets are not enjoying the hardball currently being played. Last week, President Trump's threat of steel and aluminum tariffs scared the markets badly. The eurozone suggested it too was considering tariff moves against U.S. companies, while China considered reprisals against U.S. agriculture. Is a trade war brewing?

At the same time, it appeared that many of our most popular market all-stars were intent on invading their opponent's ballparks. Amazon (AMZN) refused to sell Google (GOOG) (GOOGL) products competing with its own Alexa, and then Google declined to make other support items available on Amazon. And today, Amazon says it's looking into offering checking accounts. Immediately, the big banks began to consider countermoves.

Suddenly, everyone appears to be playing hardball - and investors don't like it one bit.

Last week stocks confirmed the assessment I offered a few weeks ago: The recovery from the recent sell-off would not result in a V-shaped recovery but rather would roughly trace out a W-shaped pattern of recovery. Such a pattern would require at least one more dip in stock prices after the indexes' initial recovery high.

This is what appears to be happening. Stocks recovered over half their losses from the February 9 low recorded in the S&P 500 Index by February 27. Since then, the Index has turned lower, with three 1%-plus down days in a row, seeking a new low point from which it will hopefully launch a full-fledged recovery into the new highs I'm expecting before early May.

Last Thursday's close in the S&P could turn out to be the bottom that provides that launch point. In any event, 2,560 seems to be support for the S&P, while a breakout above 2,740 would indicate a move to new highs could be in the offing.

Much of the latest down leg has been blamed on President Trump's tariff announcement. He told his supporters in the Midwest that he would consider tariffs. But many investors seem surprised by his actions.

Yet, the president hasn't even instituted the tariffs yet. The tariff threat may be, and probably is, just the latest presidential "Art of the Deal" move - an opening gambit in the middle of the renegotiation of the NAFTA agreement.

While there has been much discussion of the impact of the tariffs on China, as it makes up about 20% of the imports affected, it's noteworthy that over 17% of these imports are from Mexico and Canada. The president said as much in his tweet linking tariffs and NAFTA.

Still, most in the financial community, this writer included, do not like even the threat of tariffs. Their introduction in the early days of the Great Depression seemed to worsen and prolong that economic tragedy.

Yet, today there is little chance that we are even approaching a recession, let alone a depression. Early recession warning signs are not on the horizon at the present time.

There have, however, been some signs of weakness in the economic reports of late, and that has certainly contributed to the current market downturn. Last week 15 reports underperformed economists' expectations, while 10 outperformed. The following chart of the number of economic reports with year-over-previous-year positive results further bears witness to the recent weakness. Still, we remain in positive territory, and the sort of plunge that preceded past recessions is not evident.

Stock market seasonality is positive. Spring training season has been positive in the past for stocks, right through to opening day and the early days of the regular season.

March and April have been the fourth- and second-best months, respectively, to be invested in the last 20 years. April is the second best over the last 100 years.

My Detroit Tigers had a nice winning streak going for them at one point in this year's spring training. However, it, like the S&P's 15-month winning streak, ended last week. Given that the Tigers are in a rebuilding phase, their streak does not give me much hope for a winning season this year.

However, Bespoke Investment Group reported that, in the past, when the S&P has ended a winning streak of 10 or more months, it has actually been good news for investors. In the month after the first down month, the S&P has always been higher, and the average gain over the five occurrences was 4.65%. The Index was also always up over the next six months and one year.

This is just one more reason why I believe that the hardball being played in today's financial markets still has the chance of yielding some easy softball pitches for investors to hit out of the park this spring.

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