As we head into mid-February investors will be coming to grips with the fact that our ‘embrace the chaos’ approach to investing in the Trump 2.0 world may have been an understatement. Many funds and wealth managers will be trying to anticipate some of the potential policy twists and turns ahead. This will keep consultants, political economists and tea leaf readers employed. At some stage though, trying to guess what happens next could be more of an exercise in judging relatively random proclamations within the parameters of the ‘headline metric’ being that Trump is MAGA oriented, but is happy to consider himself a better judge of how economies work than anyone else. An overlay or filter could be that long lasting damage to US stock market indices should be avoided, but Trump may tolerate this in some circumstances.
The focus this week is on the announced tariffs (25%) on steel and aluminium imports to the US. The devil, as investors know from previous policies, will be in the detail. Trump also announced ‘reciprocal’ tariffs on countries that already have tariffs in place, and of course he has announced that further tariffs would be imposed on countries that retaliate against the new US measures.
For the purpose of this blog, we are looking at two US sectors, industrial shares and agricultural firm shares. XLI (Industrial Select Sector SPDR fund) can serve as a proxy for industrial shares in the US S&P 500 index, while the VEGI iShares MSCI Agriculture Producers ETF is a proxy for companies in that sector.
At Tricio we look at charts as a guide to investor sentiment. The XLI weekly chart with 13 and 50-week moving averages (relative chart to the SPX index in red in the bottom panel) below shows that the industrial sector has done well over the last few years. Many of these firms use steel and aluminium imports as an input into their manufacturing process (GE Aerospace is the largest holding in the fund). Being able to pass the potential rise in input costs onto consumers (defence and airline industry) is possible, but margin compression seems likely. Watch the red lines as near-term support, use the purple line and rising blue line ahead of the flat orange as big levels to hold else a tumble back to the February 2020 highs may be seen further out. We are not looking for such a big meltdown, but a fall below the 50-week moving average looks at risk for a pullback to the rising blue line if investors judge the potential 25% tariff on some key inputs as not helpful to companies in this sector.
The chart below is the VEGI ETF as the last time that Trump tussled with China in a tariff war agricultural firms got caught in the crossfire. The US ended up pushing more subsidies onto farmers in response of course. The ETF peaked just after the Russian 2022 invasion of Ukraine but consolidated for much of 2024. Further consolidation around the flat red line would seem likely, but for our purposes, use the flat blue resistance line as a potential ‘let’s rally’ signal if broken. The rising blue support line can be used as an ‘oh-oh, watch out below…’ signal. A note of caution is that the trend going into the consolidation period was down, so there may be a negative bias to the breakout (bear flag sort of pattern, or part of a larger topping pattern). The relative chart (to the S&P 500) in the bottom panel shows the underperformance to the broader market (red line) that has been seen over the last couple of years.
The bottom line is that trying to anticipate the upcoming twists and turns in US trade and economic policies will keep fund managers and wealth advisors busy over this cycle. Long-term investors who put money into low-cost index trackers and have balanced portfolios may be able to weather the dips and benefit from rallies. The key of course is what the Fed does, as their rate cycles can trump (haha!) other policies. However, charts, like the ones above, may give insights into how investor sentiment is changing as they try and anticipate what happens next.
Gerry Celaya
Chief Strategist
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