Have you ever watched a lake in a thunderstorm?
Heavy rain pummels the surface. Dark clouds drop the sky closer to the water. Gusty winds crash waves ashore. Up top, on land, damage may occur. Underneath, in the deeper water, things often remain pretty much the same.
Last week’s stock market volatility was like a thunderstorm on a lake. Markets were doing well until the squall brewed up on Friday. Ben Levisohn of Barron’s described it like this:
“The fun started on Friday morning, when China announced new tariffs on $75 billion of U.S. goods and a resumption of penalties on U.S. cars. Surprisingly, the market handled it pretty well. U.S. futures markets dipped into the red, but only a bit, and the market appeared ready to shrug off the news, particularly after [Federal Reserve Chair] Powell stuck to his message: The Fed will ‘act as appropriate to sustain the expansion’…That wasn’t enough for the president…he turned his wrath on China and ‘ordered’ U.S. companies to ‘immediately start looking for an alternative to China.’ Now that’s escalation – even if it’s unclear whether the president can legally do that.”
Unsettled, stock markets seethed and stormed. By the end of the day, major U.S. stock indices were lower, and that’s how they finished the week.
The U.S. economy, which is the deep water under the U.S. stock market, continued along as usual. On Friday, The Economist reported, “…economic data do not suggest that America is sliding into recession. Although inflation remains low and manufacturing activity is weakening, consumers keep spending and there is little sign that unemployment is about to rise.”
The economy isn’t moving fast, but it’s moving steady. Stock markets, on the other hand, are suffering the storms of investor sentiment and anxiety.
Don’t let volatility get you down.
Last week was the 40th anniversary of BusinessWeek’s infamous cover headline: ‘The Death of Equities: How inflation is destroying the stock market.’ The publication’s current iteration, Bloomberg Businessweek, reported it is still getting grief over the headline and subsequent bull market. In its defense, stocks trended lower for about three years after the magazine hit newsstands.
Since its 1982 low point, “The total return on the Standard & Poor’s 500-stock index…with dividends reinvested has been nearly 7,000 percent. Not bad for a corpse.”
Investors worried back in 1979, just as they do today.
At that time, the Federal Reserve was waging a war against inflation. Late in the summer of 1979, the annual average inflation rate in the United States was 10 percent. Homebuyers were locking in mortgage rates of 11.1 percent on 30-year fixed mortgages and feeling good about it as mortgage rates rose to 18.5 percent by October 1981.
Today, investors aren’t worried about inflation. They are concerned about the U.S.- China trade war, the pace of global economic growth, the influence of monetary policy, negative interest rates…the list goes on.
Recent stock market volatility reflects those concerns.
It’s possible we’re nearing the end of the longest bull market for U.S. stocks. Further inversion of the yield curve last week suggested recession could be ahead. However, it’s unlikely to arrive immediately.
If a recession does arrive, remember economic downturns are temporary and are relatively short. The Great Recession lasted 18 months and it was the longest since WWII. Typically, a recession averages six to 16 months, according to the Minneapolis Federal Reserve.
Right now, there is reason to believe the U.S. economy still has some oomph. Barron’s reported, “The economy is obviously slowing, but not necessarily heading for recession. That means it is time for caution, not panic.”
Global selloff. Quick comeback.
Investors boomeranged from stocks to safe havens and back as trade tensions between the United States and China intensified last week. The Economist reported:
“On August 1st President Donald Trump warned that he would soon impose a 10 percent levy on roughly $300bn-worth of Chinese goods that have not already been hit by the trade war. Four days later China responded by giving its exchange rate unaccustomed freedom to fall. The yuan weakened past seven to the dollar, an important psychological threshold, for the first time in over a decade. And stock prices in America duly fell...”
Asia Times explained, “Beijing has signaled that it is prepared to endure a long and debilitating trade war with the United States…A reported directive to Chinese companies to refrain from buying U.S. farm products seems an in-your-face challenge to the U.S. president.”
The possibility of a prolonged trade war triggered worries about global recession and set off a selloff. Global stock markets experienced the biggest one-day decline since February 2018, according to Bloomberg, and U.S. stocks delivered the worst one-day performance of 2019, reported MarketWatch.
Stocks staged an impressive recovery on Tuesday. Then, central banks in India, Thailand, and New Zealand announced unexpected rate cuts. The moves incited concern about the health of the global economy and stocks dropped again – and recovered again. By the end of the week, nearly all losses in U.S. stock markets had been erased.
If recent volatility has triggered a desire to change your investments, please get in touch with us before you do.
Tariffs strike again.
The Federal Open Market Committee completed what it called ‘a mid-cycle adjustment’ with a quarter-point rate cut last week. Some investors were unhappy when Fed officials implied there would not be another reduction this year. They’d been hoping for at least one, reported Barron’s.
Despite the disappointment, investors settled and U.S. stock markets rallied on Thursday.
Then, like a movie villain that just won’t die, U.S. import taxes – a.k.a. tariffs – reared their ugly heads and wiped out the week’s gains. Barron’s explained:
“By midday on Thursday, the stock market had all but recouped its losses in the wake of the Federal Reserve’s policy meeting the previous day. That’s when President Donald Trump announced that he will impose a 10 percent levy on an additional $300 billion of Chinese goods on September 1. The shock sent stocks underwater and resulted in this year’s worst week for the S&P 500 index and the Nasdaq Composite, which slid 3.1 percent and 3.92 percent, respectively. The Dow got off with just a 2.6 percent nick. For the broad U.S. stock market, the paper loss was about $1.1 trillion, according to Wilshire Associates.”
Tariffs have pummeled U.S. and Chinese economies for months. Early estimates suggest imports from China to the United States fell by 12.6 percent from June 2018 to June 2019, while exports from the United States to China fell by 16.8 percent during the same period, according to a source cited by Barron’s.
Bond investors were jolted by the tariff announcement, too. The yield on 10-year U.S. Treasury notes dropped from 2.1 percent last week to 1.9 percent, reported MarketWatch. In Germany, all maturities of government bonds are offering negative yields.
In the face-off between rate cuts and tariffs, tariffs may prove to have a greater impact.