By The Washington Post · Taylor Telford
November was a blockbuster month for Wall Street, as strong earnings and trade hopes yielded 10 record-breaking closes for U.S. indexes. The Standard & Poor's 500 is now up 25% for the year heading into a period that's typically high-performing for stocks. December could also bring progress on the trade front, as the terms of an agreement by the United States, Mexico and Canada could be finalized, while resolution on the first phase of a trade deal with China continues to flit in and out of reach.
The trade picture darkened Monday after President Donald Trump announced on Twitter that he would reinstate steel and aluminum tariffs on Brazil and Argentina. He accused the two nations of weakening their currencies to gain competitive advantage against the U.S., an oft-repeated rebuke that he's cited in his ongoing push for lower or even negative interest rates from the Federal Reserve.
"Brazil and Argentina have been presiding over a massive devaluation of their currencies. which is not good for our farmers," Trump said in Monday morning tweet. He then pivoted to the Federal Reserve, saying the central bank should "act so that countries, of which there are many, no longer take advantage of our strong dollar by further devaluing their currencies. This makes it very hard for our [manufacturers] & farmers to fairly export their goods. Lower Rates & Loosen - Fed!"
Stock futures had been trending up before Trump's early morning announcement. By midmorning, the Dow Jones industrial average had shed more than 200 points, or 0.7%. The Standard & Poor's 500 index was down 0.9% and the tech-heavy Nasdaq was down 1.4%.
"The President's tweets slapping import tariffs back on steel from Argentina and Brazil gave markets the jitters however as it is a reminder that the trade war will not be solved overnight," said Chris Rupkey, chief financial economist of MUFG Union Bank, in a note. "The stock market's early gains in the futures markets melted away after the President's early morning tweet. The President reminded us yet again he is a "Tariff Man" and this long trade battle with America's trading partners isn't over yet."
Futures markets had swung higher on trade optimism and signs of recovery in global manufacturing. Two surveys over the weekend showed that China's manufacturing sector rallied to an eight-month high in November, and European manufacturing data showed a better-than-expected easing in the sector's contraction. The strong data suggested that China's economy could be stabilizing after months of a brutal slowdown, quieting some fears about the trade war's toll on one of the world's most powerful economic engines.
Meanwhile, U.S. manufacturing disappointed in November, according to Monday's report from the Institute for Supply Management. Its manufacturing index dropped to 48.1% in November from 48.3% in October, coming in well below analyst expectations. Readings below 50% indicate business conditions are getting worse.
"Global trade remains the most significant cross-industry issue," Timothy Fiore, chair of the ISM's manufacturing business survey committee, said in the report.
Last week, Trump said that negotiators were in "the final throes" of sorting out a trade deal with China that would bring the first phase of resolution in the 16-month conflict. But over the weekend, China's state-run newspaper, the Global Times, reported that negotiators are optimistic about a deal before the Lunar New Year in January, but that rollbacks of tariffs are essential if a deal is to be reached,
On Friday, a top Mexican trade negotiator said that terms of a replacement for the North American Free Trade Agreement - one of the Trump administration's key goals - could be cemented early this week, fueling hopes that Congress could approve it before the end of 2019. The Trump administration reached an agreement with the governments in Canada and Mexico last year, but it must be approved by the House and the Senate before the changes can become official.
Trump's renewed tariffs on steel and aluminum dealt a surprise blow to one of Brazil's most crucial industries in a vulnerable moment for the economy, as unemployment hovers above 10% and growth continues to slow. Brazilian steel exports to the U.S. accounted for roughly $2.6 billion last year - making the U.S. one of Brazil's biggest markets for steel - and analysts expected the tariffs to be painful.
The flurry of potential trade activity is coalescing during what is typically a period of low volatility and high advances for stocks, said Sam Stovall, president of CFRA Research.
"Seasonal optimism typically gathers additional steam in the final month of the year as investors look to earnings projections for the coming year. Indeed, since 1945, the S&P 500 posted its best average return in December, along with the highest frequency of advance and lowest level of volatility," Stovall wrote in a note to investors Monday. "Trade relations, earnings estimates and valuations will likely influence trading this month, while the angle of ascent for U.S. economic growth, along with the presidential primaries, will garner additional attention as the new year progresses."