Insights 
VT 
The Dow Jones Industrial Average experienced a steep decline on Friday, dropping over 1,000 points within the day. This was in response to the US President withdrawing from anticipated trade talks with China and announcing increased tariffs on all Chinese imports. Market expectations for a peaceful trade resolution between the US and China were dashed, leading to a surge in demand for safer investment options.
China’s implementation of stricter trade policies regarding rare minerals, adding new export licensing requirements, exacerbated tensions. This coincided with faltering trade negotiations between the nations, as the US President maintained his stance on tariffs via social media.
University Of Michigan Consumer Sentiment
The University of Michigan’s Consumer Sentiment Index saw a smaller-than-expected decline, slightly easing concerns. Meanwhile, the 1-year Consumer Inflation Expectations decreased marginally to 4.6%, though the 5-year expectation remains higher at 3.7%.
Tariffs, distinct from taxes, are designed to protect domestic markets by imposing customs duties and offer a competitive edge over imported goods. While some economists view tariffs as necessary, others argue they can lead to higher prices and trade disputes.
In the lead-up to the 2024 presidential election, the US President expressed his intent to use tariffs to bolster the national economy. Mexico, China, and Canada were the top contributors to US imports in that year, accounting for 42% of total imports.
The market is still processing the fallout from last month when the Dow plunged after the White House escalated the trade dispute with China. This sudden reversal on trade talks has reintroduced significant uncertainty into equities. For the coming weeks, we should anticipate that this tariff-driven volatility will remain the dominant market theme.
Market Volatility And Investment Strategies
We are positioning for continued price swings by watching the CBOE Volatility Index (VIX), which jumped over 35% following the September tariff announcement. This behavior mirrors the sharp VIX spikes we saw during the 2018-2019 trade war, suggesting that long positions on VIX futures or call options offer a direct hedge. The market’s fear gauge is telling us to expect more turbulence ahead.
Technology stocks, particularly semiconductors, are highly vulnerable due to their reliance on Chinese manufacturing and consumers. The SOXX semiconductor ETF is already down nearly 12% from its late summer highs, and further tariffs could easily push it lower. We see opportunity in buying put options on key industry players with significant Chinese exposure.
The conflict over rare earth minerals is now a critical factor, as China controls over 80% of the world’s refining capacity for these materials. This gives them significant leverage, making related stocks and ETFs like REMX exceptionally volatile. This is not a place for directional bets, but rather for volatility strategies like straddles for traders who can manage the risk.
Investors are flocking to traditional safe havens, just as they did during past trade conflicts. Gold has been a clear beneficiary, with futures contracts rallying as institutional funds seek shelter from the equity storm. Buying call options on gold-tracking ETFs like GLD remains a prudent strategy to protect against further downside in the broader market.
While the latest University of Michigan consumer sentiment reading was slightly better than expected, the underlying inflation data is worrying. The 5-year inflation expectation remains elevated at 3.7%, which may tie the Federal Reserve’s hands. This reduces the likelihood of interest rate cuts that could otherwise cushion the market from trade-related shocks.
