It's a good thing trade wars are "easy to win," right? Otherwise, investors couldn't really be blamed for doing some hand-wringing over yet another big, red down day for the stock market. A day where the venerable Dow Jones Industrial Average dropped an eye-popping 724 points, or -2.93%. A day where the now nine-day pullback appeared to accelerate. A day where bond yields, which are supposed to be rising in response to improving economic conditions, fell as investors sought safety from the sell programs. And a day where (a) the S&P 500 finished below its March 1, intermediate-term "retest low" and (b) the DJIA "tested" the artificially-induced panic low seen on February 6, 2018. Yowza.

Thursday started with fears that the Trump administration's tariffs on China could be a problem. Then, things got worse after the following NYT headline hit: "John Dowd quits as Trump's lead lawyer in special counsel's Russia probe." I don't know about you, but my initial reaction was, "Wow, that can't be good."

But then we got the announcement from the President that he was slapping $60 billion worth of tariffs on Chinese products in the areas of aeronautics, modern rail, new energy vehicles, and high tech products. The problem wasn't the fact that Trump actually made good on a promise to make China pay for its "unfair" trade practices. No, it was that (a) the $60 billion was twice the amount that had been floated and (b) Trump said Thursday's actions were "the first of many." Yep, that's right fans, the administration is expected to announce its next round of penalties within two weeks. Super.

According to Trump's trade director, Peter Navarro, the U.S. is "strategically defending itself against economic aggression." The president is standing up for American corporations, Navarro said. Awesome.

The thinking in the market (algos can actually think these days, can't they?) is today's action represents the first round of what could morph into a full-fledged trade war with China. As such, it was an "everybody out of the pool" day on Wall Street Thursday. The sell algos were clearly in control (the longest rally in the final two hours of trading lasted... wait for it... six minutes!) and nobody dared try to go the other way into the close. So, the word you are looking for to describe the close is, U-G-L-Y.

Looking at the charts, the bad news is that the trend of the DJIA is also U-G-L-Y as another day like yesterday will produce a fresh new low and lots of talk about the correction being ongoing. The good news is that (1) the S&P chart doesn't look nearly as bad. (2) the chart of the NASDAQ looks better still, and (3) the Russell 2000 (aka Small Caps) is actually still in an uptrend. Thus, one can conclude that the degree of the current stock market freakout is tied directly to the exposure to the potential damage from a trade war.

Decision Time

So... Let's cut to the chase. Now is the time for investors large and small to decide whether or not this trade "thing" will be short-lived. For example, if you find yourself in the "this will blow over quickly" camp, then it is probably a good idea to leave your positions alone, round up the kids, and head to the beach for spring break. However, if you are of the mind that this mess is gonna stick around awhile, then raising a little cash (to be put to work at an opportune time), buying some bonds, and moving to the small caps might make some sense here.

But for longer-term investors such as myself, I think the best plan is to remain calm. After all, we've been assured that trade wars are "easy to win." And with the outcome not in question, my plan will be to add to equities into any additional overly emotional events occurring at the corner of Broad and Wall.

Thought For The Day:

What you do speaks so loud that I cannot hear what you say. - Ralph Waldo Emerson

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research

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At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.

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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

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