Trade War Hits Consumer Confidence, Stocks Retreat

Today, the Conference Board released September’s Consumer Confidence Index data. The index declined sharply to 125.1 in September from August’s 134.2. The reading was also below the expected 133.5. Consumers’ assessment of the present economic situation, as well as future expectations, saw moderation with the respective subindexes falling.

The Conference Board’s Lynn Franco noted that the escalation of the trade war toward the end of August played a significant role in suppressing consumer confidence in September. On September 1, the US implemented a 15% tariff on $110 billion of Chinese goods entering the US.

The first tranche of China’s retaliatory tariffs on $75 billion of US goods entering China also came into effect. President Trump was reportedly considering a further escalation of the trade war. Last week, trade worries overshadowed the markets, as China’s trade delegation abruptly canceled the goodwill visit to American farms affected by the trade war.

While the S&P 500 (SPY) opened higher and gained during early trading, it appeared to give up those gains due to the fall in consumer confidence. At 11:48 AM EDT, the S&P 500 Index was down 0.2%. The Dow Jones Industrial Average (DIA) was down marginally, and the tech-focused Nasdaq (QQQ) was down 0.7% at the same time after opening higher.

The health of the consumer discretionary sector hinges on how confident consumers feel about the current economy as well as their expectations. Because consumers are more likely to make major purchases like cars when they feel confident, a fall in consumer confidence generally hampers auto stocks.

At 11:33 AM EDT, Tesla (TSLA) was trading down 4.6%. Tesla is trying to escape the tariff war by building a Gigafactory in China. By producing the Model 3 locally, this move allows Tesla to sidestep the trade war and reduce manufacturing costs.

Apple (AAPL), which also relies on consumer sentiment, pared most of its gains on dismal consumer confidence data. AAPL was trading up 0.2% at 11:44 AM EDT. Apple produces most of its products in China by using contractors such as Foxconn. In particular, the tariffs that become effective on December 15 are expected to subdue Apple’s profitability. Apple is an outspoken opponent of the trade war.

Amazon (AMZN) and Alibaba (BABA) traded deep in the red today. At 12:24 PM EDT, Amazon was down 1.65% while Alibaba was down 2.3%. Because Amazon’s Echo devices are affected by the trade war, Amazon is looking to shift its production to Vietnam. Alibaba stock has lost 1.4% so far in September as the trade war has escalated.

So far, the Fed has maintained a measured approach toward monetary policy. The Fed cut interest rates by 0.25% during its last meeting, but it didn’t provide any clarity about interest rates’ trajectory. Diminishing consumer confidence may force the Fed to be more accommodative to sustain the expansion. The Fed has already said that the monetary policy decisions would be based on data.

President Trump, who is demanding dramatic interest rate cuts, may try to put the ball in the Fed’s court. In the past, Trump has blamed the Fed for keeping rates too high and the dollar too strong, hampering American exporters.