February turned out to be the worst month for stocks in 2 years. It was the first monthly decline in 10. The smooth, elevating price action from 2017 evaporated. There were 4 trading days in February that experienced a 4% intraday range. That is more in 1 month than we’ve seen in the last 5 years. March started off with the same tune. Volatility is back. The correction continues.
This is the 6th 10%+ selloff for the S&P 500 since the Bull Market began 9 years ago. They usually occur every 10 months or so. As we’ve pointed out before, this one was way overdue. The fact that there was no correction whatsoever last year made for a swifter and more violent correction this year. Remember, last year saw the DOW and S&P go the longest period in history without even a 3% selloff. Clearly that was not normal. But corrections are. They’re also healthy. It’s Market medicine.
The Market has been processing all of the new developments and information and trying to price them in. It seems like every day there’s something new. It certainly keeps us on our toes. So much of the good had already been priced in as we entered 2018. The accelerating economic and earnings growth has triggered some inflationary pressures, something that has been missing for nearly 10 years. Interest rates, which are effectively the price of money, have been rising. Are higher interest rates going to slow down corporate or consumer spending? Are they going to slow down the housing market? Will higher rates have investors switch back to bonds from dividend stocks? Those are questions being pondered. The Dollar has moved higher the last few weeks after a year of weakness. This all impacts assets like stocks, bonds, commodities and real estate. Global trade is a big issue again. There are many cross-currents underneath the surface which make for a bumpy go.
News that President Trump planned to impose tariffs on imported steel and aluminum sent global markets lower. Why is this an issue you might ask? Fears of a trade war are back. The US is the largest importer of global steel. That said, we only import 1/3 of the steel we consume. China is the presumed target. Consumers of aluminum and steel would certainly see prices go up. Tariffs are like taxes. The reality of these trade tariffs is that Canada and Brazil, not China, likely would suffer the biggest impact of any U.S. tariffs on steel. Canadian and Brazilian steel account for 30% of U.S. steel imports. China, frequently criticized politically for dumping cheap steel on trade partners, is not even in the top 10 exporters of steel to the U.S. Of all Chinese imports to the United States, steel represents just 3%. China won’t really be impacted by the proposed tariffs. We import more shoes than steel from China. However, China consumes roughly half of the world’s steel today.
One could argue that the US would suffer the most from the proposed tariffs. It’s very debatable. The issue is really not about steel and aluminum in isolation. The risk is the response and where this could be headed. China will certainly use this to their advantage on the global stage. Those that are large users of steel and aluminum like the auto manufacturers, beverage companies and makers and users of heavy industrial equipment are really feeling the pain. American Steel producer stocks soared on the news. However, the US consumes more metal than produces. We have far more steel consumers than steel makers in this country. Consumers would ultimately feel the pain of a tariff. Many are interpreting this as the beginning of a possible trade war, which could counteract the benefits of tax-reform, looser regulations and other pro-business policies. The issue is reportedly creating serious conflict within the White House too, between Economic Director Gary Cohn and Trade advisor Peter Navarro, a former UC Irvine Professor, who has been an anti-China advocate on trade for years. Cohn is a free market thinker while Navarro is more protectionist. In this case, Navarro seems to have won out over Cohn. The Market got rattled last year when rumors circulated that Cohn might leave the White House. It got rattled again.
The Market correction continues. It’s a process. More selling was going to come regardless of this week’s events. It was just the catalyst. We still believe that a re-test of the lows is needed to form a strong bottom. The volatile price action will likely stick around into Spring. You could view the correction like a big storm that needs to run its course. Storms are natural and needed and some are bigger than others. The best defense is to hunker down and protect what you have. We’ve been doing just that with various hedging methods as well as raising cash. Things will be fine on the other side. We are starting to look at what we want to buy once the correction passes. We’re on it.
Have a nice weekend. We’ll be back, dark and early on Monday.