Tariffs, domestic political unrest and the Federal investigation into the major players in the tech sector adds up to three strikes for the equity markets, reports Jeff Greenblatt.
Back in the day when I went to school, the lads and I bemoaned the fact while we studied historical events from the American Revolution through World War II, there were no events of note that qualified as history.
Now I look back on it as the good old days. Today’s traders might not have signed up for it, but all of us have to navigate historical events. We are living in an intense period where we are dealing with history being made on a regular basis. Hank Stram might have matriculated through the Minnesota Vikings defense but if he was trading now chances are he’d find it more difficult to get through the developing bear’s defenses.
You’ll remember the recent Federal Open Markets Committee (FOMC) meeting where they had the dovish stance on rates and the market sold. I told you at the time the market was moving on. Two days later President Trump announced tariffs on China and the market hasn’t been the same. That was the beginning of May. Strike one.
A couple of weeks later we learned about impeachment and declassification. The market doesn’t like any event that will interrupt the good economy. There is good precedent for it as the market got crushed in the early 1970s during the Watergate scandal. That was strike two.
Over the weekend we learned of a joint investigation by the Federal Trade Commission and Department of Justice concerning antitrust action against the technocrat companies. I believe that’s strike three.
Think about it, we have a market led by the FAANG stocks: Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google (GOOG), where at least two of them, Google and Facebook are obvious monopolies. These are market leaders, major tech stocks. We’ve seen when one of them sneezes, the whole market catches a cold. What is going to happen when Google and Facebook get full blown cases of the flu? You know the answer; the stocks that led the bull market are no longer going to be leading the bull market. Many reading this, not all will remember the day a judge decided on antitrust action against Microsoft (MSFT) on a Saturday and by Monday the Internet bubble burst.
Does anyone remember the Smoot-Hawley Tariff Act of 1930? It raised tariffs on more than 20,000 imported goods. Much of the Great Depression was blamed on tariffs. We find ourselves in a situation where the three conditions, which contributed to the biggest bear markets of the 20th Century, are all materializing at the same time. So, what is a Fed chairman to do? He did the only thing he could do, he all but said rates would be cut later this year.
Complacency is very dangerous. Fifteen hundred out of the 2,200 passengers died on the Titanic due to not enough lifeboats. The establishment believed the ship was unsinkable. On Monday the crowd was hiding under the bed. What did the crowd do the day after the news was received? Tuesday was one of the most bullish days of the year. They came out, pretending it didn’t happen while behaving it was business as usual again. The stock market has serious structural problems that won’t be solved by lowering rates this time. Over the weekend a message was sent to politicians, the media and Wall Street, the U.S. Government means business this time in their investigations against big tech.
All the interest rates cuts in the world won’t change anything if the investigators have the political will to break up big tech. This won’t happen tomorrow but it will happen. It will likely be accomplished prior to the next election as will the investigations led by the new Bill Barr/James Durham team as it relates to the origins of the Trump/Russian investigation. Is it amazing all of this materialized at the same time the favorable period of the four-year Presidential cycle for stocks came to an end?
Right now, the stock market is once again in bounce mode. The readings at the low this time are mediocre at best. Without the favorable cyclical wind at its back, it is highly questionable as to how much a bounce can sustain at this time. Even if it does sustain for a while, history is now against the market. It will be tough for the market to overcome any one of the three conditions mentioned, let alone all of them working at the same time?
Right now, the market believes interest rate cuts are going to save the day. It could be wrong. It has the feel of the crowd climbing the slope of hope.
