Fed cuts and tariff threats shake up markets
Stocks went from the penthouse to the basement Thursday in less than an hour after President Trump said the U.S. will impose additional tariffs on China next month.
The Dow Industrials and S&P 500 lost 3% and 2.5%, respectively, this week, amid the volatility from trade war fears as well as concerns that this week’s Fed rate cut will be one-and-done.
If bulls remain on strike Monday, bears will target the gap at the $288 level of the SPDR S&P 500 (SPY), which is 1.4% lower than the current quote.
Bulls are upset because Trump’s threats of a new round of tariffs on $300 billion in Chinese goods increases the chances the U.S. economy could head into recession, and that the Fed will be more aggressive cutting interest rates in an effort to head it off.
The president’s tweet came a day after he expressed his dissatisfaction with the Fed’s quarter-point rate cut, saying that Powell “let us down.”
The new tariffs, according to Trump’s tweet, would go into effect Sept. 1 and would be 10% on $300 billion in goods, on top of the 25% on $250 billion already in place. Later, on the White House lawn, Trump said that he could raise tariffs even more, and put 25% tariffs on the $300 billion in goods.
At a campaign rally Thursday night, Trump said, “Until there’s a deal, we’ll be taxing hell out of China.”
The president seems blithely and dangerously uninterested in the truth about tariffs: They are a tax on U.S. consumers, not on China. Aides like Gary Cohn have tried to explain this to him, but he continues to spread the false information.
Mark Zandi, chief economist at Moody’s Analytics, told CNBC that if Trump follows through on the tariffs, “that is the fodder for recessions,” and would more than likely force Powell’s hand, out of fear of the impact on business confidence and spending.
The S&P 500 recorded its first 1% or greater slide since the end of May on Thursday. In a note to clients, Morgan Stanley analysts said they expect markets to remain volatile over the coming months, as U.S. equities appear fully valued and may be underpricing the risks of inflation, corporate margin compression and a slowdown in capital spending. Uncertainty surrounding the Federal Reserve’s next move will also likely weigh on equities, as investors pore over economic data to gain a sense of future monetary policy.
The S&P 500 Index is currently up 18.9% year-to-date, while the Nasdaq is up 23% and the Russell 2000 Index has risen 16.8%. Both the S&P 500 and NASDAQ have fallen from their recent all-time highs, and now sit roughly 2% below those levels. Despite the day’s pullback, valuations remain full, with the S&P 500’s consensus forward price-to-earnings multiple sitting over 17x.
Overall, the MS analysts expect 2019 will be a better year than 2018 but with significantly more good news currently priced into markets, they advise caution over the volatility storms ahead.
Here’s what my friend Jack Albin, a veteran money manager in Chicago, had to say:
We highlight that Federal Reserve Chair Jerome Powell has stressed multiple times that one of the Fed’s primary goals is to keep the expansion rolling. Without an inflation threat and with low global interest rates, the Fed still has the flexibility to ease. Despite market concerns that the Fed may not ease as much as expected, data from the CME suggest there is roughly a 91% chance (up from 87% yesterday) of further cuts by December, with the majority expecting an additional 50bps of easing.
Furthermore, 2020 is an election year and we expect President Trump to use his pulpit to gin up support from business leaders, consumers and of course the Fed to ensure the economy cruises through the election. This represents more ammo for additional rate cuts. This rate cut marks just the fifth time in the past 25 years that the Fed switched from raising to lowering rates. In the four prior cases, the Fed has never cut rates just once.”
Lastly, here is an interesting “digital disruption” item from DataTrek Research:
Chinese insurer Ping An is developing a range of very cool AI-based apps for its customer businesses and selling them to third parties:
If a Ping An auto insurance customer gets into a car accident, they can send pictures of the damage from a mobile phone app to receive a repair estimate in three minutes. Calculated by an AI-powered algorithm, the customer can simply approve the estimate and get the repair money instantly.
In 2018, Ping An settled 62% of claims using this tool, saving $750 million in the process.
Ping An is also using its cloud-based computing approach to offer AI-powered services to smaller financial institutions, hospitals and medical clients. Read more here.
What does this mean?
China has a very different approach to technology than western countries, much less concerned about data privacy and more focused on getting products into service. For my favorite plays in this space that trade on the U.S. markets, consider taking my Tech Trend Trader service for a test-drive. Start here.
Jon D. Markman