The US stock market’s upward momentum has finally broken. The S&P 500 closed below it’s 200-day moving average for the first time since March 2016. And the selling was broad-based as over 400 stocks in the S&P500 closed below their 50-day moving averages. A number of factors came together to make today an awful day for shares. But chief among them was alarm over US President Donald Trump’s more aggressive foreign policy decisions.
Pro-Business Trump stance not enough to propel stocks forward
When Donald Trump cam into office, stocks surged on the back of optimism about likely tax cuts, a lessening of business regulation, and a pickup in economic growth. Trump delivered on his tax cuts. The package he signed in December was mostly a corporate tax cut. And higher wage earners received the lion’s share of personal income tax cuts. They could then plow more of their after-tax wealth back into stocks.
Moreover, the regulation rollback continues as well. Just today, the Environmental Protection Agency announced it would ease vehicle emission standards, a move for which US automakers have lobbied. The move also threatens states rights. California has a waiver from the EPA under the Clean Air Act which permits the state to set stricter environmental standards. And the EPA said in its news release that it is re-examining that waiver.
But this was not enough to push stocks higher today. We saw a major selloff right out of the gate. The only positive was a late but tepid rally that saw the S&P 500 close above its February 8 low.
Protectionism doesn’t sell stocks
Last week, market weakness centered on the tech industry. But today’s selloff was not about tech. According to market veteran Eddy Elfenbein, the tech ETF XLK was down inline with other sectors. He saw Discretionaries, Energy, Financials and Industrials down more.
The big concern was China’s retaliatory tariffs on American products, announced on Monday morning Beijing time. This was the first sign that Trump’s more aggressive moves on trade would have negative implications for American products abroad.
Moreover, the ISM Manufacturing survey released this morning provided fuel for the selloff. The prices paid component of the survey came in with 78.1% of producers showing an increase. That’s the highest level in seven years. And the number was off the charts compared to all of the other figures and subindices quoted
Source: Institute for Supply Management
So not only are markets concerned that Trump’s trade policies will hurt US exports. They are also concerned that Trump’s policies will stoke inflation. And this would cause the Fed to move into high gear, sending interest rates up.
The yield curve flattening continues
Even as inflation concerns sparked a greater selloff, bonds didn’t budge. The yield curve remains very flat, with the 10-year bond selling for less than 50 basis points more than the 2-year Treasury.
Source: Investing.com
Given the rise in 2-year rates from well below 1 percent after the Brexit vote as well as inflation concerns, it suggests markets anticipating an unwind of Fed tightening due to economic weakness down the line.
The picture today’s market action paints then is one of concerns about the Fed’s reaction to near-term inflationary pressure and rising short-term rates followed by weakening growth and, therefore, weakening earnings growth.
And that’s not good for stocks.
Amazon as a sign of things to come
More worrying still was the President’s Twitter tirade at the weekend, in which he singled out Amazon.
His tweets about Amazon costing billions of dollars in losses for the US Postal Service, now a private company, also referenced the Washington Post. Amazon CEO Jeff Bezos also owns the Post. And the connection in Trump’s tweets made the attack on Amazon seem motivated by the Post’s coverage of the Trump Administration.
While we are on the subject, it is reported that the U.S. Post Office will lose $1.50 on average for each package it delivers for Amazon. That amounts to Billions of Dollars. The Failing N.Y. Times reports that “the size of the company’s lobbying staff has ballooned,” and that…
— Donald J. Trump (@realDonaldTrump) March 31, 2018
…does not include the Fake Washington Post, which is used as a “lobbyist” and should so REGISTER. If the P.O. “increased its parcel rates, Amazon’s shipping costs would rise by $2.6 Billion.” This Post Office scam must stop. Amazon must pay real costs (and taxes) now!
— Donald J. Trump (@realDonaldTrump) March 31, 2018
This is what ‘Trump Unchained’ looks like
Trump is now less encumbered by competing visions within the White House. Trump bases his ‘Make America Great Again’ world view on the concept that the United States can create its own destiny if its leaders are bold enough to act. The presumption is that America is so strong economically and militarily that it can practically act unilaterally. Adversaries and allies need to either get onside or get bowled over.
Of course, ‘America First’ policy requires a strong executive — and less intervention from Congress, something Trump has so far obtained from the Republican Congress. In fact, it is Congressional acquiescence to Trump which created the ‘Trump Unchained’ dynamic. His party’s falling in line has emboldened Trump because he knows he can take more aggressive actions still without vociferous public condemnation from within the party.
The dismissal of Secretary of State Rex Tillerson by tweet was the first sign of this new ethos in the White House. For Trump, that means surrounding himself with people with similar world views who can execute his vision without oversight. That’s something Rex Tillerson was unable to do. And it also means Trump’s surrounding himself with staff loyal to him. Hence, the decision to replace the head of Veterans Affairs with his own personal doctor.
Yesterday, at Easter dinner, a family friend who works at Fort Belvoir told us there is concern at the US military base that they will need to staff up. Many in the military at the base there expect a war because of President Trump’s recent actions.
Stocks are reacting to ‘Trump Unchained’
That is the downside to which markets are now, in part, reacting. Today is a reminder that the geopolitical tensions now building can have major economic consequences. And that’s largely because Donald Trump will act in contravention of past US policy. And he will do so unpredictably and unilaterally.
Isn’t that why the American people elected him?