With the first salvos being fired in a potential Sino-American trade war, the Fed boosting the funds rate another quarter point (now 1.5% to 1.75%) and the president stirring the pot in what appears to be his own war of deflection, what’s an investor to do? The only winners here seem to be the media as all of the above appear to raise angst in the consuming public and, therefore, viewership and readership. What investors (more likely traders) are doing is voting with their feet, running, not walking, away from stocks as evidenced by a Dow Jones Industrials that lost over 1150 points between Thursday’s opening and Friday’s closing (-4.6%). This puts that index firmly in correction territory (-11.6%). The weekly losses for the Dow, S&P 500 and Nasdaq were 5.75% 5.9% and 6.5% respectively … YUK!
I am prompted to step back from the emotion of the moment to try to gain some perspective. First and foremost, considering where we’ve been, this correction is long-overdue and very normal. If for no other reason, this should give you comfort. Regardless, I absolutely hate it when my stocks go down. So, let’s examine the issues that pummeled the market last week.
The following segment of my post may ring very political to some. It is not meant to be. It is just my effort to describe the effect of the current fast pace of changes, developments and tweets emanating from the White House.
It is not hard to see that the president is being confronted with potential serious legal issues not only from the Special Prosecutor but from outside causes and peccadillos that predate his presidency. With each new leak/revelation there seems to be corresponding distracting events and/or tweets that deflect attention. Last week we had two of the presidents alleged paramours (one with a very prominent and visible attorney) front and center and the whole Cambridge Analytica/Facebook story dominating the media. The counterpoints were the firing of the Secretary of State, the expected (but hastily sped up) resignation of the national security advisor (Mr. Bolton learned about being designated NSC chief while being interviewed on Fox news), the out-of-the-blue move to impose new tariffs on China and the ‘I might not sign the spending bill’ moment last Friday. This type of frenetic, unpredictable behavior does not breed confidence or certainty. As we all know, the market hates uncertainty. Ergo, the president’s actions may be starting to finally have a deleterious effect on stock prices. I don’t see this changing any time soon.
At this point it would be good to examine that opening volley in US v. China trade war. Trump, of course, fires first with tariffs on $60 billion worth of Chinese imports (US consumers lose). China returns fire with a massive (?) salvo of tariffs on $3 billion of US ag. product … hardly a proportional response. In fact the response was so muted it felt like using a slingshot to fend off 16″ gun. I’m certain the president would approve of this metaphor. So, the deed is done. You may call it a war. It does not look like one. I think the market overreacted. Don’t let the media make you crazy on this one.
After serious deliberation and with new Fed Chair Jerome Powell at the helm the Fed bumped the Fed funds rate one quarter point to a new range of 1.5%-1.75%. The was not news, totally expected and should not have a negative effect on stock prices. This is entirely a function of a much improved economy. We are out of the danger zone we faced several years back and still well below normal levels on the fund rate.
Another important point to make is that with the Fed having notched the Fed funds rate 1.5% in the last two years the !0-year US Treasury note yield has yet to pierce its 2014 high of 3.01%. Friday March 23, we closed at a 2.814% yield. Our 10 year still offers one of the best yields in the developed world. For example, the German 10yr. Bund closed Friday at 0.538% and the Japanese 10yr. went out at 0.016%. Regardless of how crazy things have gotten in the US, if you are a German or Japanese investor looking for safety and yield our 10yr. looks like the best deal in town. The same would apply if you were English, French, Spanish or Italian. Therefore our treasuries should enjoy good foreign demand regardless of additional upticks in the funds rate. My bottom line: don’t let the media make you crazy on this. Continued gradual upticks on the funds rate should NOT be viewed as a negative for US stocks.
Back to Deflection (Stirring the Pot)
Deflection, as I said before, is the one element of this post that has the potential to create a deeper broader correction. Why? Because faulty policy like the tariffs issued last week (policy or personnel moves not fully thought out) can de-stabilize and create uncertainty in the market, which in turn could prime further downside moves. I thought after the election that the market would come to this conclusion quickly (“Ladies and Gentlemen we have a Black Swan” ).
“My knee-jerk reaction, late election night November 8, was to assume that a Trump victory would be a bad thing for the market because it would create uncertainty. We did not know which or how many of the things he had promised he might actually try to do; but, Trump the candidate appeared erratic and unpredictable. I believed uncertainty about the candidate would create market weakness. Was I ever wrong!”
I corrected this quickly in the post “I Need New Glasses– That Black Swan Was White.” The strong market we enjoyed since then has been about a new era of low or no regulation, bare-knuckled, free-market capitalism and tax cuts. The market has seemed not to worry about the president’s potential suitability or personality issues. This may be about to change to the detriment of equity investors. This is the one that the media should be focused on but they are not. YIKES!
What do you think?
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