Here's the recipe for a market rally in the days ahead — get President Donald Trump talking softer on tariffs and get a benign wage growth report from the closely watched jobs numbers on Friday.
That was the bull scenario for this week, but the case for a rally was made much cloudier with the departure of Trump's top economic advisor Gary Cohn. Stock futures pointed to a sharply lower open after Cohn resigned late Tuesday.
True, the markets have had issues with the whole Trump tariff story. It's not about whether a soup can would cost a fraction of a penny more under the tariffs, as Commerce Secretary Wilbur Ross famously noted on CNBC last week. It's vastly bigger than that.
"We are in the best environment for global trade in more than a decade," Jeff Kleintop, chief investment strategist at Charles Schwab, said Tuesday on CNBC. "The economic trade and earnings backdrop is the best it's been in a very long time."
Joe Duran, CEO of United Capital, is one of many who have noted it is a much broader story. "It's not so much the tariffs on steel, it's the knock-on effects of that. All tariffs are basically a tax, and they are a zero-sum game. There's no winner when you have a tariff battle because typically you get retaliation, and the scale and scope of retaliation dictates how much we should be concerned," he said Tuesday on CNBC.
"This is a derail from what is a great underlying story."
That "great underlying story" includes tax cuts, more buybacks, but most importantly it's "synchronized global growth," which has now become one of the most crowded trades on Wall Street.
This story — the belief that global economies are expanding at the same time and that earnings are at record highs — has driven up the prices for cyclical stocks (industrials, materials, technology) to multiyear highs, while defensive stocks (consumer staples, utilities, real estate investment trusts) have lagged notably.
The "pain trade," which would cause the most damage to most market participants, is any interruption of that "synchronized global growth" story.
That's why the tariff story is causing the markets to flutter and why the bulls are so cranky. It interrupts the "synchronized global growth" narrative.
Traders are uncertain about the extent these tariffs could spark a wider trade war, so the markets will move on any headlines that clarify the story — for good or ill.
Kleintop is well aware of this: "The market is behaving logically given its volatility, falling back on days when those threats seem front and center but coming back when it recognizes the backdrop is still the strongest its been in 10 years."
We saw it again Tuesday afternoon. After a modest up opening, markets meandered until about 1 p.m. ET, when Trump ally Sen. David Perdue, R-Ga., said the president might be open to changes on his plan to raise tariffs. The S&P rose 8 points within minutes, but with no further headlines, it stopped advancing.
Traders who were looking for Trump to soften his stance on tariffs were disappointed late Tuesday. In a press conference with the Swedish prime minister, the president did not back down on his threat to slap tariffs on steel and aluminum imports, claiming that China sends much more steel to the U.S. than most people think and disputing earlier reports said that China imports only about 2 percent of the steel brought into the U.S.
Where will this end? Bulls are praying for a one-two punch. Their wish is that by the end of the week Trump will indeed sound more conciliatory on tariffs, and Friday's February jobs report will show subdued wage growth. January's year-over-year wage growth of 2.9 percent was the strongest since 2009; it caused a 50-point drop in the S&P 500 and was the start of much of the chaos in the markets in February.
If we get that one-two punch, markets will rally.
Until then, the bulls are on edge. Jim Lacamp, UBS senior portfolio manager and another strategist who remains bullish, acknowledged that the trade wars could get worse but "I'm not operating under that assumption now. If we start seeing the charts break down and start seeing the global moving averages slip below the 200-day moving averages, if we start getting the message that we have a bigger problem here, absolutely I'm going to readjust my thinking."