President Donald Trump on January 22, 2018, first enacted tariffs on washing machines and solar cell manufacturers — the first volley in a trade war that now spans almost two years. In that time — 624 days later and up to October 8, 2019, to be exact — the Dow Jones Industrial Average Index has lost about negative 50 basis points (excluding dividends) and has traveled a total of 78,600 points up and down to get there.
Uncertainty injected into the markets by tariff and trade issues has weighed on the markets from the trade war’s start.
If you thought the markets had not moved in awhile, you would be right. If you thought every up move was met with a down move, you also would be right. This logjam cannot last indefinitely because at some point, either a deal will be struck, and the market moves higher — or there will be a continuation of the discord that slows the economy beyond stall speed and into the recession the bond market has signaled for months.
Smaller companies and International stocks have been especially less fortunate over this period. Diversification throughout the trade dispute has provided nothing but worse-ification.
Seeding the clouds (China & The Fed)
On October 1, The People’s Republic of China celebrated 70 years of communist rule with great fanfare that included an enormous military parade, complete with jet flyovers.
To increase the chances of good weather during the big event, the Chinese seeded clouds around Beijing several days beforehand. Cloud seeding is a weather modification technique in which aircraft drop salt and other chemicals into clouds to encourage rains that give way to blue skies. Cloud seeding has become commonplace in China, where authorities have spent approximately $1 billion between 2012 and 2017 to improve weather before the Olympics and other events garnering international attention.
The Chinese are not the only ones spending big on cloud seeding with hopes of modifying the future. Both Federal Reserve Chairman Jerome Powell and Mario Draghi of the European Central Bank have taken a decidedly dovish stance to bolster the slowing economies on both sides of the Atlantic. They are cutting rates and buying bonds. Consider:
- The Fed lowered rates 25bps a second time and has entered into balance sheet expansion — bond buying to stabilize the repo market. The repo market (repurchase market) is where big investors with excess cash can lend overnight to big borrowers with cash needs. Here’s why you should you care: On Sept. 17, rates in the overnight market spiked to 10% from 2% the week before as the demand for cash outstripped the supply. Some suggest this turmoil was merely a timing issue around corporate tax payments, but others see longer-term turmoil because this kind of stress last was seen during the Financial Crisis. This is something that bears watching.
- In Europe, Mario Draghi lowered inflation and growth forecasts for the Eurozone, cut rates to negative -0.50% and will provide additional stimulus of $20 billion a month. Mr. Draghi also has called directly on Europe’s politicians to enact fiscal stimulus, realizing monetary stimulus only goes so far.
Mr. Powell and Mr. Draghi appear to be attempting cloud seeding with hopes that these actions will clear today’s economic clouds and provide sunnier times ahead.
The above stimulus, anticipation of stimulus to come, and continuing global growth concerns, provided a tailwind for the bond market to rally ferociously and push rates overseas down to unprecedented levels. Interestingly, once all the stimulus was confirmed, it appears the rally in bonds hit the pause button. The market must have sensed the big central banks would be accommodating and sold off once it was confirmed, a moment of “buy the rumor, sell the news.” While this may mark the end of the bond rally, it is more likely a pause that could be reignited once a full-blown recession comes to pass or geopolitics flare further.
To add to the all of the uncertainties of 2019, an attack on Saudi oil refineries by drones was coincidently timed ahead of the Saudi Aramaco IPO. On Sept. 13 the drones knocked out close to 5% of global supply and oil prices subsequently spiked about 10%. Yemen’s Houthi rebels claimed responsibility for what one commentator hyperbolically called a “Pearl Harbor” moment. The fast-moving event had President Trump tweeting he would open strategic petroleum reserves with the U.S. being “locked and loaded.” However, U.S. Energy Secretary Rick Perry said it was too soon to discuss release of strategic petroleum reserves. The initial panic triggered a spike in price followed the very next day with a price drop of about 5% as Saudi Arabia said the Abqaiq processing plant already had restored 2 million of the 5 million lost barrels per day. While the attack very likely will pressure the Saudi Aramco valuation and possibly delay the IPO, it is a stark reminder that the Middle East is still a hotbed of negative catalysts. Even so, the price of oil since has fallen only 5% below the price before the strike — as if nothing at all occurred.
Source: Bloomberg LP. Spot price of oil .
As we have discussed for many months, the bond market, as reflected in the yield curve, has signaled concern around economic growth. The yield curve historically has been one of the earliest warnings of recession or slowdown, and yet many pundits have suggested this time will be different. Now, as if on cue, negative signs are starting to appear in the economic data. While many employment data points remain strong, a confluence of early-mover job data points are beginning to roll over. Job openings and average work week are starting to fall, and overtime hours also are beginning to contract.
Source: Bloomberg LP.
Manufacturing data released in the latest Institute for Supply Management Business Survey show a sharp slowdown in current activity and new orders. For all the handwringing around interest rates and the strong dollar, most survey respondents were significantly more concerned about trade and tariffs. “Global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019,” stated Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee.
“Overall, sentiment this month remains cautious regarding near-term growth.”
For all the events market participants have endured over the last year and half or so, it is amazing to think the markets are within a few percent of their all-time highs. The resilience of the stock market is to some degree astonishing, but more a measure of good corporate earnings and low interest rates. We believe that after this long consolidation period, the stock market has a chance to move higher temporarily with any whiff of good trade news. However, economic momentum has been blunted by trade uncertainty and geopolitics and is unlikely to recover before stall speed is realized. Any sunny days derived from cloud seeding (rate cuts) by the Federal Reserve only will delay the bigger rains to come.
As always, we are here to answer all questions you may have about any of the topics addressed here, or other concerns you may have. Feel free to contact us anytime.