Just What Happened Last Week?

Monday, March 31… SPY shot up to pare recent losses, enthusing investors, despite President Trump’s assertion that “you’d start with all countries.” The market was stoked as he also said the tariffs would be more generous than trade partners had been to the United States.

Tuesday, April 1… the S&P 500 edged higher, awaiting “Liberation Day” after a volatile session.

Wednesday, April 2… 4 p.m., ET… Trump opened up; SPY shot to a weekly high.

Then, he presented his infamous chart, and all hell broke loose.

The first issue was the twisted math. For every country, they took the U.S. trade deficit and divided it by that country’s exports to the United States, as calculated by the Council of Economic Advisers. Problem is that trade deficits are unrelated to tariffs.

For example, the United States and Canada have a relationship whereby the United States imports more goods from Canada than it exports, resulting in a trade deficit. This is primarily due to oil. It simply means that Canada has shipped more value in resources, deeply discounted oil to be exact, to the United States than it has received. In return, the United States sends goods to Canada, but not in as great a value, because Canada is a country that is one-tenth the size of the United States population-wise. Incidentally, trade agreements were ratified by all parties. This does not mean that Canada has “looted, pillaged, raped and plundered by nations near and far, both friend and foe alike,” as Trump declared. The latest agreement is the U.S.-Mexico-Canada Agreement (USMCA), ratified on July 1, 2020, as proposed by, you guessed it, then-President Trump himself!

As for the trade deficit, Canada’s contribution to the overall U.S. deficit is the second lowest among trading partners and hardly moves the needle. China, Mexico, Germany, Taiwan, Japan, Korea, Italy and India all boast higher deficits. A danger here is that Canada will likely find other markets and, should the United States wish to return to its previous agreements, may not be able to secure the discounted energy pricing it has previously enjoyed. The market price would be much higher… not a good situation.

The Canada-U.S. Auto Pact, a precursor to NAFTA, primarily benefited the United States, fostering a larger, more integrated North American auto market that led to economies of scale. Both countries benefited from increased efficiency and lower prices. President Lyndon B. Johnson and Canadian Prime Minister Lester B. Pearson signed that agreement. The point is that any existing agreements were sanctioned by the leaders of the time. A more dignified approach to tariffs would be to review each agreement and make necessary adjustments, primarily as many were written long before we transitioned into a more globally integrated society.

There can be volumes written about this situation. This dissertation is not intended to criticize the objectives of President Trump’s policies; indeed, his work is monumental, with a national debt exceeding $36 trillion and a daily interest charge of approximately $3 billion. My objective is to assess the stock market reaction. Updated as of last Sunday, the U.S. stock market has seen $9.6 trillion in value erased since Inauguration Day.

Last Thursday and Friday alone saw a market value of $5 trillion wiped out. We came precariously close to triggering the first circuit breaker last week, which would have halted trading that day. Investors are not impressed. That said, we knew there would be a point at which investors would recognize a buying opportunity and return to the market.

Yesterday in the Trading Room, Jon noted a strong technical support level on SPY and discussed the possibility of this stock heading substantially higher but requiring a catalyst. We discussed President Trump’s “Art of the Deal,” his modus operandi, and how this stock is poised to snap up. Lo and behold, true to form, at 1:19 p.m., ET, the announcement of holding off on tariffs for 90 days was the stimulant we were awaiting. SPY shot up more than 48 points in a matter of minutes, and so did our calls!

Eagle veteran guru Jon Johnson and I comment on the situation every morning in the Trading Room. If you had been involved in it, you could have bagged a 500% gain.

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