“Mourn as a nation, rule as a mob… kill for an insult so slight… the further they plummet, the blinder they are… each one believing they’re right.”
“I’m the monster, I exist… On this summit I am lost… On its slopes I’ve seen… The world as she was meant to be seen…”
You can interpret these lyrics from the 2009 song Insatiable (Two) by the Austin alternative rock band And You Will Know Us by the Trail of the Dead however you like. Yes, it’s the apex of tax season, and I’m working more hours than ever before. At the same time, I need to comment on this week’s massive market selloff. The last five days were the worst week since January 2016. All major averages are well into the red for 2018, and the VIX, or Volatility Index, has risen by over 150% in the last six weeks. The sheer weight of the numbers is crushing- the Dow Jones Industrial Average shed over 1400 points to its lowest level since last November, the S & P 500 Index lost over 5%, and NASDAQ broke through the 7000 mark. What caused all this, and where are we headed?
There are several reasons for this correction, not the least of which is that moves of this type are normal. However, this week was immensely ugly, exacerbated by a confluence of events leading to an atmosphere of utterly no certainty on Wall Street. In no particular order, here’s what happened (remember that I’m only hitting the highlights and it’s only for one week):
1) After walking back on most of the rhetoric of his steel and aluminum tariffs, President Trump announced a new multi-billion dollar set of tariffs on China. The Chinese quickly retaliated with a list of ten US industries that they would potentially impose tariffs upon, and gave detailed evidence and specifics. As is typical of the President, there were few specifics of his plan, and it appears as though the Chinese have the upper hand here. They own a significant amount of our Treasuries, and could elect to dump them for spite if nothing else. We also import far more of their goods than they do ours. I can agree with the idea of negotiating a more balanced trading relationship between the two countries, but this rash act sent world markets reeling. It’s ironic that President Trump was touting his record as the greatest creator of equities wealth ever, but isn’t addressing Wall Street’s reaction to his edict.
2) The Federal Reserve raised interest rates ¼ % on Tuesday afternoon. While this move was almost universally expected, the tone of new Fed Chairman Jay Powell was perceived by some as a bit hawkish. In another ironic twist, even though rates were increased, the yield of Treasuries actually decreased in the face of the tariff brouhaha.
3) Speaking of hawkish, President Trump fired National Security Adviser H.R. McMaster (although McMaster allegedly resigned) and replaced him with former US ambassador and Fox News analyst John Bolton. Many of us remember Bolton as the far-right fringe of the neocons in Bush Two’s administration. As of late, Bolton has written op-ed pieces in the New York Times and Wall Street Journal calling for intervention strikes in Iran and North Korea. He also stands by his decision to have promoted the wars in Iraq and Afghanistan. A note of further irony here as few pundits have brought up Trump’s anti-Iraq war stance during the nomination process.
4) Former CNBC personality Larry Kudlow took over as Chief Economic Adviser. Even though Kudlow has long been an ardent supporter of free trade, he took the job nonetheless. It is rumored that Kudlow had to agree with the President’s decision on Chinese tariffs in order to be offered the job.
5) Facebook was guilty of a massive data scandal last weekend. Their top executives, Mark Zuckerberg and Cheryl Sandberg, violated every basic principle of public relations by waiting until Thursday afternoon to offer apologies. No independent investigator has been named to ferret out the reasons for the breach, and the stock lost over 12% on the week.
6) If Robert Mueller’s investigation weren’t enough to make the President seethe, three women have recently accused him of having an affair with them and then paying hush money through a third party to keep them quiet. Let’s not forget that the road to President Clinton’s impeachment proceedings began with his lying to a grand jury about his dalliances with Monica Lewinsky and Paula Jones.
A lengthy list to be sure. As the noted 1960’s satirist Tom Lehrer said, “That was the week that was”.
Despite all of these newsworthy events, I refuse to panic. I mentioned in my last missive that traditionally a double bottom forms following an initial correction. From a charting technical perspective, that’s what we’re watching here. We’re testing the 200 day moving averages as we speak. The usual leaders in the markets, technology and financials, have been replaced by energy and utilities. That’s certainly not a good sign because the latter two sectors comprise a very small percentage of market capitalization. Sentiment seems to be getting more bearish, but that might be a decent harbinger that we’re getting a bit oversold.
Let’s be realistic. Facebook’s gaffe isn’t going to send the masses searching for another social media platform. There might be more government scrutiny ahead for the companies making money from our data, but Facebook basically prints money, and a lot of it. I am, though, worried about Trump’s White House now being almost wholly comprised of sycophants. Only Chief of Staff Kelly and Secretary of Defense Mattis remain as potential dissenters to Trump’s ever-evolving worldview.
In the end, markets have weathered political crises throughout history. A nasty trade war wouldn’t bode well for anyone, but Trump has walked back from the brink many times. He’s gone from trolling Kim Jong Un to scheduling meeting with him. On Friday, he signed a government extension spending bill even though it didn’t satisfy his DACA wishes or fully fund his border wall. The fact that November’s midterm election currently looks problematical for Republicans could influence policy. Even Trump has to realize that a Democratic takeover of the House and/or Senate would effectively neutralize him.
In the meantime, try to breathe normally. Basic fundamentals haven’t changed much even with all of the extant noise. We must all try to cut out the clutter and stick to our long-term plans. I’ll report back after the tax dust settles.
The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification cannot assure a profit or guarantee against a loss. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.