Although the popular reasons continue to be The Fed raising rates (causing us to dip into recession), inflation (putting more pressure on the Fed to ratchet up rates) and trade wars (today’s favorite flavor based on a White House proposal — trial balloon or misstatement on the part of Secretary Mnuchin — to restrict Chinese investment in US technology). A secondary reason on the trade front is the decision by Harley-Davidson to move some of its motorcycle production offshore to avoid a new 25% retaliatory tariff from the EU on US produced motorcycles (this is on top of a 6% tariff that was already being imposed … we’re talking about a 31% tariff or about $2200 additional per average Harley). This too will pass when the political base (factory workers losing jobs and farmers seeing the price on soy beans and hogs crack) begins to scream in unison. Finally, most will scream as the price of much that they buy, much of the merchandise on the shelves at Walmart that is sourced in China, will be marked up to cover the cost of our protective tariffs.
BTW, the Congress has the power to stop this foolishness: Article I, Section 8 of the Constitution gives Congress the power “to lay and collect taxes, duties, imposts, and excises.” These guys and gals are a real profile in courage.
So, where’s the real danger?
To see the real factors that might cause the first real break we’ve seen in this market in years you have look backward. By looking backward, I mean look backward to the election of president Trump. I will illustrate with a couple of kortsession posts from the 2016 presidential election:
In the “black swan” post I let political judgements and emotions get in the way of my analysis and had to eat crow. In post number two, three days later, I realized that the market had sniffed out the themes of reduced or no regulation and tax cuts and the effect these would have on profitability and earnings growth. As long as these factors would be in operation it would be smooth sailing. As such, when these factors disappeared or were threatened is when I believed the market would run into trouble. By the way, this may be news to the media (a freakout moment) but it is normal for the market to run into trouble from time to time.
As we move toward the mid-term election, based on the current controversy (disaster, humanitarian and public relations) on the border (plus previous controversies) and what appears to be an energized electorate on the left, it does appear that the House of Representatives will become controlled by the Democrats. This becomes a threat to deregulation (not immediate–but clearly the game will have changed). This will clearly make the president a lame duck. If the potential “blue wave” materializes and is pronounced enough it may bleed into the Senate causing Republican Senators from purple states to be significantly less likely to align themselves with the administration. Then, lest we forget, there’s the Mueller investigation. Taken as a whole these factors are a threat to the bare-knuckled, free-market capitalism that stocks have enjoyed the past 18 months. The tax cuts of 2017 may also be perceived to be in jeopardy, especially if deficits begin to run hotter than expected — Voila! the perfect set-up for a major shift in psychology and a cyclical bear market (also a normal occurrence).
Please do not sell everything based on my musings and speculations. Just know these possibilities are out there, may effect equities in an adverse way and that would all be be very normal (not the end of the world) if they occur. Know what you own and be comfortable with what you own. This will make a tougher market environment easier to navigate.
What’s your take?
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment strategies or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.