OCT 24, 2018 (TWO WEEKS BEFORE MIDTERMS): Nasdaq down 4.43% (-329)…S&P 500 down 3.09% (-84)… Dow down 2.41% (-608)
‘Yikes’ or ‘Yawn’?
As far as the stock market goes, it’s a ‘yawn’ (and get ready to start saying ‘yipee’).
YEAR-TO-DATE: Nasdaq (7006 7108) is UP 1.45%
YEAR-TO-DATE: S&P 500 (2695 2656) is DOWN 1.45% (The S&P 500 officially closed in ‘correction’, meaning down over 10%, from a record high reached on Jan 26th, from 2872, down to 2581, on Feb 8th; and today 10/24/18, while being back in correction territory during market hours, closed down 9.3%, just shy of official correction, from the record high reached September 21st, from 2929 down to 2656).
YEAR-TO-DATE: Dow (24824 24583) is DOWN 1%
“Relax…Everything is fine…There’s nothing bad out there…We still have a way to go before we see wage or profit margin compression…Right now only 2 of the 6 recession indicators that I have are checked off, the third one is the yield curve inversion that hasn’t happened.”—Logan Mohtashami 10/23/18
Two of his six recession indicators, meaning Logan only sees about a 33% chance of recession, or in other words, about a 77% chance of no recession, so this economy, this market, still has a lot more upside potential. This correction is a ‘yawn’ and get ready to start saying ‘yipee’ at the end of the year.
IS THIS A RERUN OF 1987 when another strong Republican president had the market routinely breaking records? On 08/17/1987 the Dow Jones Industrial Average closed above 2700 for the first time at 2,700.57 (+40% year-to-date). On 10/19/1987 ‘Black Monday’, stock markets around the world suffered an unexpected dramatic drop, with the DJIA closing at 1,738 after falling 508 points (-22.6%), the largest one-day drop in recorded stock market history, AND first financial crisis of the modern globalized era, BUT the DJIA ended 1987 closing at 1950—UP 1% for the year.
IS THIS MIDTERM ELECTION UNCERTAINTY of a close race? The Blue Team, down two touchdowns (the White House and the Supreme Court), are now at Fourth & Goal and they need to score, they need a touchdown (either the House and/or the Senate), for some locker room enthusiasm before the start of the second half. Blue *might* score, OR all this is just ‘noise’ posing as ‘uncertainty’ and the market has already factored in that on Nov 6th, Red will easily stop Blue at the goal line.
IS THIS ‘TAPER TANTRUM 2’? The 2018 stock market corrections and the 2013 taper tantrums were both caused by expected and actual surges in US Treasury yields. Higher interest rates can be unfriendly to stock prices. Equity markets can be spooked easier in a rising interest rate environment (as per Warren Buffet, rising rates are like increased ‘gravity’ on stocks). In 2013, the market had a tantrum over expected FOMC rate rises to come following the Fed’s announced bond buyback reductions (officially ending the ‘QE’ years); and now in 2018, the tantrum is over the Fed’s actual FOMC rate rises that recently went above the ‘accommodative’ level (officially ending the ‘easy money’ years). However, keep in mind, that the reason why interest rates have been moving up is simply because the economy is doing better, which is of course, good for stocks. For example, even with the taper tantrum in the spring of 2013, U.S. stocks closed 2013 at records, with the S&P 500 ending the year with a strong finish, posting its largest annual jump in 16 years (UP 29.6%) and the Dow its biggest gain in 18 years (UP 26.5%).
OR PERHAPS THIS IS ABOUT CHINA? Rather than being about US politics and US economics (being mostly about anything going on locally); it’s probably more likely that the US stock market jitters of 2018 are mostly about the ‘trade war’ and what it means for the world’s second largest economy (being about things going on internationally). When details of the newly-agreed U.S.-Mexico-Canada Agreement (USMCA) were made public, it soon became apparent that President Trump was doing more than just ‘saber-rattling’ against US trade deficits but also circling the wagons in an us (free-market economy) vs. them (‘non-market’ economy’) pendulum swing that threatens a paradigm shift of future supply chains / industrial clusters away from China. The deal brings the US trade relationship with Canada and Mexico into the 21st century, which also includes a modernized, high-standard and never-before-seen rider that provides strong protection and enforcement of North American intellectual property rights. In another bad omen for China, the new agreement will keep up with the fast-changing American economy that, together with the Tax Cuts and Jobs Act (that included a US corporate tax cut from 35% to 21%, a lower one-time tax on repatriated profits earned overseas, and letting companies immediately deduct 100% for the cost of new equipment in the same tax year), reduces the incentives of US company offshoring (of manufacturing jobs leaving the US). The new trade agreement means the end of the United States delegating manufacturing to China; and the beginning of a renewed focus on American nation-building, putting American manufacturing first, bringing back the aggregate demand that reopening those shuttered US factories brings their communities and creating more opportunities for American citizens to get REAL jobs to make the American economy great again—not just fake ‘job guarantees’ that political ‘prescription’ MMTers keep promising you along with more free ‘this’ and more free ‘that’.
Thanks for reading,
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P.S. I have to admit that I had some ‘inside information’ when writing this post and concluding that China’s economic jitters this year was mostly to blame for the jitters in the US stock market. Full disclosure, after 30 years in the financial field as a US Treasury bond broker, I retired and moved to Bangkok at the end of 2015. Since my wife of 24 years and I, moved here, the Stock Exchange of Thailand, has done well, the SET Index has gone from 1244 on 01/08/16 to 1828 on 01/26/18—UP 47% during the past two years. Until this year, however, when the US ‘trade war’ with China, the world’s second largest economy, started getting more serious and then the SET Index went DOWN 14% for 2018 after hitting a low of 1595 on 06/29/18. China is Thailand’s largest trading partner. In addition, for decades, the largest number of tourists visiting Thailand, are Chinese. So Thailand relies heavily on both tourists and trade from China. China’s stocks, the Shanghai Composite Index, dropped to their lowest level in nearly four years in September and at this writing is down 20% year-to-date for 2018. Throw a depreciating Chinese currency—the weaker yuan—into that mix; and it becomes more obvious that the Chinese are understandably tightening their belt, which affects the Thai economy, which is causing Thai stock market jitters, which is why many local Thais say their business is very slow (and why my landlord hasn’t raised my rent for 2019).