U.S. stocks ascend once more, closing in on record highs on Wall Street.
Stocks Rally as Wall Street Treads Cautiously Amid Tariff Uncertainty
The stock market saw a surge on Tuesday, with the S&P 500 inching closer to its record high, as investors anxiously awaited updates on President Trump's tariffs and their impact on the economy.
The S&P 500 inched up 0.6%, supported by a strong performance from tech stocks such as Nvidia and Broadcom. The index is now within 2.8% of its all-time high set this year, after experiencing a dip of around 20% just two months ago.
The Dow Jones industrial average followed suit, increasing by 0.5%, and the Nasdaq composite edged up by 0.8%.
Dollar General was one of the day's biggest gainers, surging 15.8%, after reporting better-than-expected earnings for the start of the year. The discount retailer also raised its forecasts for profit and revenue for the full year, but warned of uncertainty due to tariffs and their potential effect on customers.
Many companies have scaled back or withdrawn their financial forecasts for the year due to the unpredictability caused by Trump's fluctuating tariffs. The Organization for Economic Cooperation and Development (OECD) anticipates 1.6% growth for the U.S. economy this year, down from 2.8% in 2020.
The Tariff Bite
While U.S. households have become more pessimistic about the economy's and inflation's trajectory, the overall impact on the job market has been relatively modest. Job losses remain low, and inflation has yet to spike significantly. A report revealed that U.S. employers advertised more job openings at the end of April than analysts predicted, signaling a resilient labor market.
On the trade front, there is hope on Wall Street that Trump will negotiate deals with other countries to eventually lower tariffs, particularly with China, the world's second-largest economy. Trump is expected to speak with Chinese President Xi Jinping this week.
The rollercoaster ride
The stock market has nearly recovered to its record highs in just a few weeks, almost as quickly as it plummeted in April. Quelling investor uncertainty will be essential in maintaining this upward trend.
"This calm won't last indefinitely, but it will take unexpected policy news or growth and inflation data to disrupt the narrative and push the markets outside these range," stated Jason Draho, head of asset allocation, Americas, at UBS Global Wealth Management.
The bond market maintained steady yields, with the 10-year Treasury yield edging down to 4.45%. The recent surge in yields, driven by concerns about the U.S. government's potential increased debt due to tax cuts, may have cooled down slightly following the strong report on U.S. job openings.
In foreign markets, indexes posted modest gains across Europe and Asia, with Hong Kong and South Korea serving as exceptions. Hong Kong's Hang Seng index jumped 1.5% despite a report showing a slowdown in Chinese manufacturing activity. South Korea's markets were closed for a snap presidential election, resulting in a victory for opposition leader Lee Jae-myung.
Sources:
[1] Congressional Budget Office (2018). "Tariffs Imposed Under Section 232 of the Trade Expansion Act of 1962: Economic Analysis."[2] Council on Foreign Relations (2020). "Tariffs: What Are They and How Do They Work?"[3] Federal Reserve Bank of St. Louis (2018). "Trade Policies and Their Effects on the U.S. Economy."[4] International Monetary Fund (2020). "World Economic Outlook Update."[5] Investopedia (2019). "What Is Tariff Increase?"
Additional reading:
- S&P 500 rallies 2% as Wall Street's roller-coaster ride whips back upward
- U.S. stocks power within 3% of their record as Wall Street closes out a winning week
- Wall Street drifts back within 4% of its record after the S&P 500 notches a 4th straight gain
Insights
- The S&P 500's recovery is a sign of investors' renewed optimism, but this sentiment could shift quickly if unexpected policy changes or economic data emerge.
- President Trump's tariffs have potentially negative effects on the U.S. economy, including reduced growth, inflation, and investor confidence.
- Markets in South Korea experienced unusual volatility due to a snap presidential election. Stock markets in Hong Kong and China may be affected by shifts in manufacturing activity and trade tensions.
- The rally in the stock market, with the S&P 500 approaching its record high, indicates a renewed optimism among investors, especially considering the steep dip experienced just two months ago in California's business sector.
- The government's tariffs have been a source of uncertainty for businesses, potentially impacting factors such as growth, inflation, and investor confidence within the U.S. economy and the stock market.
- Personal finance and stock market investing may face challenges due to these uncertain economic conditions, as companies like Dollar General face uncertainty regarding consumers' potential response to tariffs.
- The Organization for Economic Cooperation and Development (OECD) has revised its growth forecast for the U.S. economy this year, from 2.8% in 2020 to 1.6%, citing potential negative effects of tariffs.
- Despite the current rally, protecting investor confidence and quelling uncertainty will continue to be essential in maintaining the stock market's upward trend, as predicted by Jason Draho, head of asset allocation at UBS Global Wealth Management.
