The market has gotten numb to the tariffs. Is this one different?

PRE-OPEN MARKET COMMENTS FRIDAY – Overnight Trump said that he is going to impose a 35% tariff on Canada on August 1st and promises to go higher if they retaliate. This is our largest trade partner and this could get contentious. I mentioned in my comments earlier this week that if trade negotiations are not progressing we would likely know this week.

This week we learned that 50% tariffs would be placed on Brazil and 25% tariffs would be placed on Japan and South Korea. The market yawned and then it made a new all-time high. We have yet to hear about Mexico, but their President has been defiant and I would not be surprised to see a 35% tariff imposed there as well.

The market sold off earlier in the year when the initial tariffs were announced. They were much higher than anyone expected. Since then the market has rallied and the 10% base tariffs that were universally imposed did not ignite inflation and they did not cause supply disruptions. There are a few explanations why the market doesn’t seem to care.

The first reason is that no one believes that this will be the final resting point for tariffs. They are a moving target and Trump can change them at any time. Some analysts believe that he won’t follow through with the plan so they are taking a wait and see approach. The second reason is that many companies ordered goods in advance of the tariffs to front run them. That inventory needs to be worked off and that is one reason why inflation has not spiked. This supply needs to be worked off and that is going to impact economic activity right now.

There will be a considerable lag to the impact of tariffs on prices and it might still take a few months to play out. China has stock piles of inventory they are trying to unload and manufactures are selling goods for pennies on the dollar. They’ve tried dumping supplies in Europe and we have seen their exports pick up there. The EU is discussing anti-dumping regulations in its meetings with China this week. In short, these depressed prices and oversupply could temporarily soften the impact on prices.

Longer-term, prices will increase. Companies will try to circumvent the tariffs and there will be supply disruptions as they figure out the logistics. Ultimately, businesses will shift manufacturing to the US and that is Trump’s objective. This is going to take 1-2 years at minimum and there will be short-term pain.

China is using its rare earth minerals as leverage. It has stopped shipping to many countries and it was a primary negotiating topic. They want our computer chips in exchange for rare earth minerals. The US said that it will not honor the trade agreement until actual shipments have been received. US companies are in short supply and this is going to create disruptions. Toyota announced that it has to stop production for it’s EV cars until it can get the rare earth minerals and China is barely exporting them to Japan.

Yesterday the US Department of Defense announced a multibillion dollar investment in MP Materials to start production in California. This takes time to develop and it should be operational in 2028. I can’t understate how important rare earth minerals are to the technology sector. This government investment confirms how urgent this is. China processes about 90% of the world supply. Last month Ford said that it is stopping production of EVs because of a shortage of rare earth minerals.

The market is going to crash because of tariffs. Didn’t happen. Inflation is going to spike because of tariffs. Didn’t happen. The economy is going to tank because of tariffs. Didn’t happen. Trump is going to abandon tariffs (TACO). This is where the rubber meets the road and I don’t believe he is going to back down. He has talked about creating the External Revenue Service and the government has already collected $100 billion in tariff revenue.

Investors are going to wait for proof and I believe it’s coming. There is a lag to all of this. The Fed understands this and that is why they are not going to cut rates in three weeks (5% chance).

In the absence of any current tariff impact, consumers are cutting back. Economic conditions have been slipping and the average hourly work week has been declining along with productivity. These are the precursor to layoffs. Companies want to hold on to employees as long as possible because of training costs. This week Amazon announced that sales declined 41% Y/Y for the first day of Prime Day. This is a massive drop and I am waiting to hear if that continued. Amazon did extend the event to four days and that might have an impact.

The tariffs are going to strain foreign relations and they are going to cause supply disruptions. It might take a few months for them to impact prices, but eventually they will. The big issue is not tariffs, it is softening global economic activity even before they were imposed. You’ve heard me harping about this since the beginning of the year.

I’m liquid and I am very content passively trading what I believe is the last leg of this rally. My bearishness has made me look foolish, but I have to call it like I see it. That comes with the territory of doing your own analysis. Your confidence in your market analysis drives all of your trading decisions. Sometimes you will be very confident and sometimes you won’t be confident. I’ve participated in this last move higher, but sparingly. I will be ready to strike when I see a technical breakdown.

Earnings season kicks off next week. I’m not expecting any dire news from banks because employment has still been strong. I will be watching for an increase in bad loan provisions. As earnings season unfolds I believe the guidance will be guarded and in many cases companies won’t provide it. That creates uncertainty and the market won’t like it.

The Big Beautiful Bill was the last upside catalyst and it did not produce much of an upside reaction. Policy news will start to die down and now we will be able to evaluate the price action without all of the reactions to headlines.

The market has been able to shoulder bad news to this point. This is a fairly substantial drop. I will be watching for an initial move into the gap. Bullish speculators will jump on this drop. I want that move to be wimpy with mixed overlapping candles. If I get that, I will look for shorting opportunities. If the bounce has stacked green candles, I will look for more of the gap to fill.

Support is at $618 and resistance is at the close from Thursday.