Market Update: Smooth Sailing Interrupted by Tariffs
By: Christopher Mistal
August 30, 2018
Thus far, the “Worst Months” of the year, seasonally speaking, have not been bad at all for the market. Following the late-January/early-February plunge by DJIA, S&P 500, NASDAQ and Russell 2000, it has been a slow, yet steady, grid higher as traders and investors sought confirmation that tax cuts and reduced regulation would lead to a stronger economy and expanding corporate profits. Recent economic data and second quarter earnings season delivered the proof and S&P 500, NASDAQ and Russell 2000 all traded at new all-time highs this week. DJIA has improved, but still has some ground to make up.
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
[Russell 2000 Daily Bar Chart]
[DJIA Daily Bar Chart]
There have been an occasional speed bump in the market’s path to new all-time highs, but they were generally rather minor as all four indexes have been climbing for the most part since the beginning of April. The charge higher from June’s lows has been even stronger. As a result, DJIA, S&P 500, NASDAQ and Russell 2000 are all currently comfortably above their respective 50- and 200-day moving averages. Stochastic, relative strength and MACD indicators are also quite positive even after today’s mild pullback.
As recently as two weeks ago, we noted that the bearish August seasonality bandwagon appeared a little too crowded for any meaningful decline to transpire in August. Today’s announcement that the Trump administration was ready to implement tariffs on an additional $200 billion worth of Chinese imports did briefly “shock” the market today as positive momentum quickly disappeared and the day ended with minor losses. Whether today was just another speed bump or the beginning of the return of volatility only time will tell.
Tomorrow is the last day before the long Labor Day holiday weekend. Historically, the Friday before the long weekend was stronger than the day after, but that is no longer the situation. Over the last 21 years, Tuesday has been stronger than Friday based upon average gain. Tuesday will also be the first trading day of September and first trading days also have a solid historical track record of gains. Septembers’ first trading day is not one of the strongest when compared to the other eleven months (page 86, Stock Trader’s Almanac 2018), but NASDAQ has done well. 
[Labor Day Table]
[First Day of September Table]
Absent any breaking news headlines tomorrow is likely to be a rather quiet trading day as investors and traders may take off early for the final long weekend of summer. After the long holiday weekend, traders and investors will then need to contend with the worst month of the year since 1950, September.
The “Worst Four/Six Months” are not over with yet. Today’s China tariff announcement should serve as a reminder that the market is still vulnerable to a pullback and it does not only go straight up day after day. Midterm elections are nearing, the Fed is tightening monetary policy and the initial boost from tax cuts is going to fade. Comparisons next year will not be as easy to beat as they were this year and growth is also likely to slow modestly. It may not be enough to trigger a bear market, but it could lead to higher levels of volatility.