When Donald Trump tweeted on Thursday that his administration would be adding a ten percent tariff to the so-far untaxed balance of Chinese imports, the market tanked. We were experiencing a bit of a bounce back after Wednesday’s response to the Fed announcement, but those gains quickly disappeared, and the Dow finished the day down 280 points. The reaction was a throwback to the early days of Trump’s presidency, and as such represents an opportunity for traders.
In the days after the 2016 election, traders were often confused by the then President-elect’s tendency to let his feelings be known via Twitter. Every angry tweet was treated as a major announcement, even though many of them led to nothing at all, and the market frequently overreacted. That led to a situation where fading that reaction became a viable and profitable strategy. That was clear before he even took office, and I outlined the approach here in December of 2016.
Now, however, two and a half years into Trump’s term, traders have wised up. The regular attacks on companies like Amazon (AMZN) barely register on the stocks involved, and the market has learned to wait for more than words before acting. Yesterday, they seemed to forget that hard-earned lesson.
The difference was that yesterday’s tweet outlined an actual policy proposal, and in an area, trade, that is already a worry. But the fact is that what we got, as has so often been the case, were words and threats, not action. That heightens the risk of an escalation to a damaging trade war, but that risk was already present and presumably priced in. Given that Trump is on record as favoring a strong, aggressive negotiating style, does some more bombastic rhetoric really justify such a selloff?
I guess you could argue that a two percent drop in the Dow from its pre-tweet levels is commensurate with the increased risk, but the opportunity comes in individual stocks that dropped as if the tariffs were already in place, and, in some cases, as if they were at a much higher rate than ten percent.
The most dramatic reaction came in the retail sector, and within that subset, BestBuy (BBY) was one of the hardest-hit stocks, losing over ten percent on the day.
The attitude seems to be that BestBuy has enough on its plate already dealing with competition from Amazon and that this could be one blow too many. So far, though, the company’s management has done an excellent job of responding to that threat. Who’s to say that they won’t handle this one as well? In a yield-starved environment, a stock that offers a dividend payout of around three percent has some appeal, especially when the company has a management team that has shown an ability to adapt to changing conditions.
It is important to stress that this is a single-stock, short-term trade idea based on a market overreaction. It would be wrong to belittle the risk that an escalation in the trade war poses to the U.S. economy, and, therefore, to stocks in general. Trump can say what he said again yesterday, that China pays these taxes, as many times as he likes, but it just isn’t true. Ultimately, U.S. consumers either pay higher prices for imported goods, or they don’t make a purchase that they would have otherwise. Either way, the U.S. economy suffers.
Still, what we are looking at here is a panicked reaction to something that history suggests is a negotiating ploy. A threat of something that may not even happen and can be easily and rapidly reversed if it does. Even in the worst case, marking down BBY as if they will absorb the full ten percent tax makes no sense.
Yesterday took us back to simpler times when the market reacted to Trump’s tweets in a way that offered an opportunity for those of a contrarian bent. It is reasonable to expect that before long, the same thing will happen now as usually did then. History and logic, therefore, both point to a rebound of some kind in BBY before too long and a trade based on that assumption has a good chance of success.