Author: Jim Iuorio for CME Group
Over the past two years the Unites States trading relationship with China has been a major market risk. What began as a discussion quickly graduated past dispute and landed on trade war. Up until this point the preferred weapon has been tariffs. Both sides have threatened and, in some cases, instituted ever increasing tariffs in an attempt to bring the other side closer to a deal.
So far no luck. Outside of agriculture, no sector has been more affected than technology. Apple, Microsoft, Intel and many other U.S. tech behemoths have relied heavily on Chinese manufacturing and now this has become a liability. How much of a liability is anybody’s guess as the political backdrop continues to change and intensify pressure.
Apple and The Trade War
While we don’t know how the trade war will resolve itself there are several things we do know. Apple and Microsoft are the world’s two largest publicly traded companies and when combined with Intel make up over 25% of the Nasdaq 100. Apple has become the poster child for the China trade war. This is probably appropriate as the company’s earbuds and Apple Watch are affected by current tariffs. The tariffs scheduled to begin in December could weigh more heavily on the IPhone.
In early August, when the president announced a new round of tariffs on China, Apple lost 11% of its value in 3 days. They were not alone as Intel lost 12% and Microsoft 8%. The Nasdaq 100 index lost 10% in the same time period.
Of course there are plenty of other industries that manufacture in China like automotive and heavy machinery, but the market seems to be acutely focused on the tech sector. If the tech sector is being unfairly singled out, it’s probably because it begins with higher volatility than most sectors and it has grown to a huge portion of the overall market.
The Nasdaq Run
Overall, the Nasdaq 100 has performed extremely well these last two years and currently has a 29% gain over that period. It’s easy to argue that there have been strong tailwinds like a positive rate picture and growing economy that have acted as a counterbalance to the trade war. It can even be argued that the when the trade war is resolved, no sector will be more positively affected than the tech sector if it includes an enforceable crack down on theft of intellectual property.
The point is that the risk picture in tech stocks has changed. Not necessarily all for the worse but definitely different and prone to additional volatility. For futures traders, one way to weather the storm may be to use Nasdaq 100 futures contracts, either E-mini or Micro E-mini to help balance exposure in times of anticipated volatility.
The Nasdaq should remain highly correlated to trade news whether it explicitly addresses technology or not. Of course it is usually the case that headline risk appears unannounced and often times we are put in a position of being reactive as opposed to proactive.