Tariff Response Presents Buying Opportunity

Market Updates

Tariff Response Presents Buying Opportunity

Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy, sees the current volatility as an opening for patient buyers.

March 22, 2018

Various moving parts are giving investors (traders) an excuse to exit positions. Thursday, the tariffs targeting China were the main catalyst for weakness. But other factors such as slightly weaker economic data globally and the debate regarding the Federal Reserve’s message coming out of Wednesday’s FOMC meeting also contributed. Technically, the S&P 500 undercut support at 2647, triggering technical selling as well.

The coming days and weeks present a buying opportunity, in our opinion. The technical breakdown in conjunction with other factors may push prices slightly lower in the near term, but our guess is the worst case scenario will be somewhere near the 200 DMA (2584, or -2% from current levels). 

We would be patient buyers (accumulating numerous times) in the coming days and weeks for the following reasons: 

Despite the current softer global economic readings, we feel the global economy is not in danger of rolling over for now. Some of the softer economic readings today are opinion polls (soft data) as opposed to hard data, which would carry more weight, in our opinion. Also, yesterday, the Fed even highlighted “the economic outlook has strengthened in recent months.” Earnings growth and now valuation also spur our desire to accumulate. Earnings are expected to grow in the upper double digits this year. The combination of rising earnings and falling stock prices reduced the valuation headwind facing the equity market at the price peak in January. At Thursday’s close, the S&P 500 traded at 16.5x next 12-month earnings versus the 3-year average of 16.8x.

The market is justified in its concern regarding trade and the resulting threat to global growth. We doubt the Administration will push to the point to alter the global growth landscape. The “art of the deal” President appears to be taking a hardline stance only to reduce the stance later. For example, after applying steel and aluminum tariffs, exemptions have been passed out. This week, the Administration backed down from a key sticking point regarding the amount of content required to come from U.S. firms in imported autos. The President also seems enamored with the reaction in the financial markets. Today’s trading, along with China’s response, along with what will be a loud push-back from U.S. companies negatively impacted by the retaliatory measures from China in the coming days, may cause the Administration to eventually back down. If a less aggressive tone transpires, stocks should rally as investors once again focus on economic and earnings growth.

For now, accept the higher volatility as the market sorts through the news flow. During the period, patiently accumulate shares of companies exhibiting the most favorable fundamental trends. We favor technology, financials, and industrials when looking for ideas based on near-term trends. We also note relative strength price gains in the energy sector in the last few days as a potential area to accumulate.

Not approved for rollover solicitation. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index. DMA or Displaced Moving Average is a moving average that has been adjusted forward or back in time in order to forecast trends. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Past performance may not be indicative of future results. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events.

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