I literally wrote two pieces earlier today, only to ditch the first, then the second, because the Market moving events kept building hour by hour. I decided just to wait until the Market closed for the week and try to make sense of it all. I’m not sure that’s possible. I hope I came close. Today was a day like few others. In many ways, it stands alone.
I emphasized it last week, and here I am doing it again; our job is to interpret all things political not get political. Earnings and economic growth are the greatest influencers on the Market. But there are times where politics influence too. Now is one of those times, and it will likely stay that way through the 2020 election.
The big news was supposed to come from the annual Fed event in Jackson Hole. It’s a Summer summit for central bankers. The Market always pays attention to it. Attention was laser focused today. The Federal Reserve has recently switched its interest rate tightening campaign to a looser policy as growth has been slowing. It cut rates in July for the first time in a decade, back during the Financial Crisis. News overnight that China hit back hard with its retaliation to increased tariffs with tariffs of their own sent stocks lower at the open. Thirty minutes later, Fed Chair Jerome Powell gave a speech at the Wyoming event, which actually sent the DOW and S&P into positive territory. That didn’t last long.
President Trump took to Twitter again this morning, fast and furious, sending messages directly at both China and the Fed, which apparently even surprised his own aides. I suppose that’s not the first time. Trump criticized China for unfair trading practices and stealing intellectual property. He is totally right on this and has been all along. China has been an unfair trader and has violated intellectual property clauses. This belief has broad bipartisan support. Taking it a step further, the President ordered American companies to find alternatives to doing business with China. I don’t believe a President has ever openly made such an order, at least not publicly. He ordered shipping companies to refuse Chinese packages. Perhaps a national security concern would make this constitutional, though surprising in such a public forum. The President also told American companies to pull out of China. That is just not immediately feasible or logical. Companies have invested heavily for decades building up supply chains in China. They cannot undo them and replace them elsewhere fast or inexpensively. It’s an unrealistic direction.
President Trump criticized the Fed again for not doing anything today, a theme that has been relentless. The President even questioned who was a bigger enemy, the Chinese President or the Fed Chairman. This is the one that perhaps gives the greatest pause. Fed Chairman Powell was appointed by Trump. He was the most dovish of all candidates, next to Janet Yellen. The Fed holds itself out to be an independent entity, which is so critical for unbiased monetary policy. It’s not abnormal for a President to be frustrated with the Fed. That’s happened with pretty much every administration. But the level and frequency of criticism by this President is. Calling the Fed Chair an enemy just seems unthinkable for a President. The other thing is, I believe, this is the first time that President Trump has called President Xi an enemy. Throughout this Trade War, Trump has always referred to Xi as his friend and emphasized the strength of their relationship. This was a notable change.
After the Market closed, the President returned to Twitter with his own retaliation to China’s threat. The 10% tariffs on $300 Billion of Chinese goods that were set to be enacted in just one week, will now be taxed at 15%. The tariffs on $250 Billion that are already being taxed at 25%, will go to 30% in October. The Market simply didn’t know how to handle this barrage of statements which later turned to action afterhours. Stocks sold off, with the S&P falling 2.5%. Bonds rallied, as they have all year, with falling interest rates. Gold exploded higher yet again, which finally came to life as a safe haven hedge in May. It was unquestionably a risk-off day.
There are more signs that the Trump administration is feeling the threat of an economic slowdown. The administration has been discussing potential stimulus options to stem the tide, with even a possibility of a payroll tax cut, though that rumor was knocked down, at least for now. While asserting the US economy remains healthy, White House economic advisor Larry Kudlow said proposals for additional middle-class tax relief and small-business tax relief may be rolled out during Trump’s reelection campaign. The President is also counting on lower interest rates to cushion against any economic blowback from the Trade War. This is why he is so angry with the Fed not being more aggressive. In case you were wondering, the White House did not have a comment regarding the President’s tweets today.
The fact that President Xi did this with Trump heading to the G7 summit in France was no way coincidental. It came after Chinese leaders held a three week Summer strategy retreat. China will be honoring the 70th anniversary of the People’s Republic. It wants to project strength on the global stage. The global economy is weakening, trade wars are escalating and major economies like Germany are sliding toward recession. But the Group of 7 allies are so divided now there is little hope for the type of coordinated response to these growing threats. China is not a member of the G7. The G7 doesn’t have the power and influence it once did. The Post World War II order is shifting, and away from global norms.
The US Economy has been holding in quite well in comparison to others around the globe. 2% growth has been the expected run rate this year, which still looks doable. But the rising uncertainty and instability around trade are putting on massive pressure. If you’re a CEO of a Fortune 500 company, how do you plan for the future and invest in an environment with so much uncertainty? What about consumer spending? Logically, you pull back and wait and see what happens. That’s a big risk for the Stock Market, still not far from all-time highs.
Last week saw a pretty substantial sell-off. The declines were all but erased with gains this week, until today. Friday brought another massive sell-off. The selling last week was fairly orderly, like normal corrective price action. Today’s sell-off was pretty violent and less constructive. We have been defensively positioned for a while in anticipation of more selling. We are staying that way. The reason we got defensive was not due to political issues. We anticipated earnings growth slowing, profit margins tightening, and the overall macro-economic environment showing tremendous stress. The Trade War is perhaps just accelerating the inevitable. We still think there is more to go before a bottom is found. The Stock Market is known for taking the escalator up and the elevator down. That’s just the way it is.
News these days comes fast and furious. We will continue to track developments as they occur. We’re all over it. We are prepared for whatever comes our way.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
