August 1st Is The New July 9th

By: Steve Sosnick, Chief Strategist

Much can happen over an extended weekend. As holiday weekends go, this one was particularly consequential for markets. Since Thursday’s early close, we’ve seen (1) the finalizing and signing of a major budget deal ¹, (2) a date confirmation ² for the implementation of tariffs, and (3) Elon Musk’s announcement that he would be forming a third political party ³. At least two of them are moving stocks this morning, and not in a positive way. (The flooding tragedy in Texas was gut-wrenching, but had no immediate ramifications for markets)

The passage of the budget deal seemed like a foregone conclusion when we left on Thursday. The bill squeaked through the Senate by the narrowest of margins, with the Vice President providing the tiebreaking vote. Despite some grousing from Representatives who professed to be concerned about the potential ramifications upon US debt and deficits, the bill passed the House with enough time to allow the President to sign the bill into law on July 4^th while military jets flew overhead.

On Thursday, we questioned whether this might be a “sell the news” event; thanks to the other news items affecting stocks today, we can’t be sure whether that was the main catalyst in this morning’s profit-taking. Quite frankly, I doubt it, even though the budget deal will almost certainly have the most profound long-term effects of the three catalysts mentioned above. Neither bonds nor the dollar seem perturbed, and those markets would feel more disruption if they were truly concerned right now about the budget’s effects upon debt and deficits.

By the way, all we are seeing so far is profit-taking. Exuberant traders took advantage of the rare confluence of good economic news, a shortened session, and a weekly options expiration to perhaps push prices farther and faster than what otherwise might have been expected. As of now, we have given back all the gains made during Thursday’s regular session but retain a gap above Wednesday’s S&P 500 (SPX) closing level.

As of now, the bigger angst seems to be coming from tariffs. Even though July 9^th is just two days from now, investors had been relatively unconcerned about the impending deadline for bilateral tariff deals. There was a general consensus that there would be some flexibility about that date, but we learned that the administration would be sending out letters to trading partners that higher rates would kick in on August 1^{st 4} if terms could not be reached before then. Furthermore, the President threatened the BRICS bloc of developing countries with higher tariffs yesterday after that group condemned them. While there still may be a fair amount of room for negotiation, this was a sign that with the budget behind us, tariffs are back in the forefront – and a reminder that there is a reasonable possibility that they could be going higher shortly. Investors are far less freaked out about tariffs than they were just three months ago, but they remain a sore subject.

Of course, we can’t ignore the effect of a -7% decline in the perpetually most active stock on the IBKR platform. It seems fair to refer to today’s sellers as “Tesla vigilantes.” Just as “bond vigilantes” are said to express their displeasure with fiscal policies by selling bonds, “Tesla vigilantes” sell that stock when its CEO and founder gets distracted by political concerns.

Most of us know, and many have participated in, the roller-coaster ride of Tesla (TSLA) shares over the past several months. They featured a massive post-election rally that rewarded Elon Musk’s backing and embrace of the newly elected President, a spring selloff that gave back most of that move, and a momentum-driven bounce that recovered roughly half the earlier gains. Most recently, we’ve seen gyrations as Musk wrapped up his controversial governmental role, launched a robotaxi test in Texas, and embarked upon an on-again, off-again feud with the President. Investors reacted positively when Musk appeared to be moving away from politics and devoting himself to his public company – today’s reaction was the result of him wading back into the political arena.

** Late note – as I was finishing this piece, we received headlines about 25% tariffs on imports from Japan and South Korea.  Stock traders were not amused.

Originally posted on July 7, 2025 on Traders’ Insight

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