Volatility has come back to the market in a big way.
What does that mean exactly?
In a nutshell, it means there is a lot of instability and uncertainty right now. And let me be clear: The market HATES uncertainty.
Here’s why that volatility is picking up:
A new Fed chair:
In February, Jerome Powell stepped in as the new Fed chair, and the markets did what they always do when a new Fed chair takes office: They went a little nuts. A lot nuts, actually: The day he took office, the Dow Industrial average had its biggest-ever point drop. There’s always uncertainty when a new Fed chair takes office because his or her policy leanings remain to be seen. But it appears the markets are testing Powell more than past Fed chairs, and experts say that’s in part because Janet Yellen, Powell’s predecessor, gave the impression she would always bail out the market, while Powell seems more inclined to let markets “do what they do.”
Quite simply, inflation is bad for business. It diminishes corporate profit margins, and it could push the Fed to raise interest rates faster than it had originally forecasted, which would make the costs of borrowing higher for investors and businesses. In testimony before Congress in March, Fed Chair Jerome Powell said there was little evidence that inflation was accelerating. But now is a critical time: If the Fed raises rates too quickly, it could stifle business borrowing and spending. If the Fed moves too slow, the economy can overheat. “We’re trying to take that middle ground,” Powell said.
The looming spectre of trade war:
The headlines the past few weeks have illustrated the rapid escalation of a trade war tit-for-tat that has the market sitting on the edge of its seat. “China imposes tariffs on 128 U.S. exports!” “Trump administration targets $50 billion in Chinese goods with tariffs!” “China targets 106 more U.S. products!” “Trump seeks additional tariffs on $100 billion in Chinese goods!” And as Jim Cramer points out, it’s far from over: “We’ve opened up a new front in the trade war, and while it’s quieter than all of the bombast about tariffs that had people freaking out, there are still a ton of companies that can get hurt here.”
Love him or hate him, President Trump is a certain force of uncertainty. In recent weeks, he’s taken aim at Amazon, claiming the online retailer “pays little to no taxes to state & local governments, uses our postal system as their delivery boy (causing tremendous loss to the U.S.) and is putting many thousands of retailers out of business.” He’s tweeted messages to North Korea, claiming the country “is looking for trouble” and encouraging China to “solve the problem.” It’s tempting to dismiss this as a harmless use of social media, but when the president tweets, the markets listen.
The Russia investigation:
President Trump has been VERY vocal in his disdain for the investigation by Special Counsel Robert Mueller into potential ties between Trump’s presidential campaign and Russia. The White House has said publicly that it believes President Trump has the power to fire Mueller and that it believes the investigation has gone way too far. If Trump fires Mueller, analysts say there would be “a swift, violent market reaction.” The good news? That reaction would likely be short-lived. The market would suffer a more protracted period of uncertainty if Congress takes steps to impeach President Trump — much like we saw in 1998 when Republicans voted to impeach then-President Bill Clinton.
The struggling FANG:
The market has lost its leadership from the so-called FANG stocks — at least temporarily. FANG refers to Facebook, Amazon, Netflix and Google (now Alphabet). They are the companies we all know and have long admired, but lately they have been struggling. Facebook has been under fire ever since the Russia investigation began and, more recently, since it announced that data from as many as 87 million users had been shared unknowingly with Cambridge Analytica. That’s nearly twice as many users as originally thought. Subscribers of our newsletter already knew of this risk to FB stock as we outlined last September. Amazon has been under attack by President Trump (frequently, as we mentioned above, in a series of outspoken tweets), saying he has long had concerns about the company’s business practices. These two companies alone account for over $1.2 trillion in market cap. The impact of these corporations on the daily movements of the stock market is significant. If these companies were to go through a long period of sideways to downward movement, it would certainly weigh on the market until new leadership emerges.
The Iran Deal (JCPAC) is no more:
President Trump announced yesterday that the U.S. will be pulling out of the Iran Deal. The repercussions of this decision are yet to be determined. Oil prices have reacted to the upside in anticipation of re-implementing of sanctions on Iran by the U.S.
Most of the causes of volatility should remain. We are in a virtual minefield of catalysts that can shoot the market to the upside and the downside in the blink of an eye.
What we do know is that the president loves to reference the stock market gains. Trump has tweeted about the stock market at least 60 times since his election in November 2016. He has explicitly tied his administration’s actions to stock market records, but did not mention markets during a public appearance as they plunged recently.
This being the case, personally, I find it hard to believe he will do anything to cause significant damage the stock market or the U.S. economy.
At the end of the day, what matters is economic growth, and that is definitely a reason to stay optimistic for 2018. However, I am starting to favor developed overseas markets while the U.S. markets look for solid ground.
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Clint Kirby – Chief Financial Strategist
DreamWork Financial Group
Clint Kirby, DreamWork Financial Group, is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.