Posted on 12/25/2018 8:59:36 PM PST by socialism_stinX
U.S. stocks on Monday posted their worst Christmas Eve session ever, as a perfect storm of concerns drove investors to bail out of a market that was already badly bruised.
The blue-chip Dow Jones Industrial Average had its steepest drop on Christmas Eve in its 122-year history. It also was the worst Christmas Eve for the tech-heavy Nasdaq Composite and the first time the broader S&P 500 ever had more than a 1 percent drop on Dec. 24. The loss for the S&P 500 put the index into bear market, where it joined the Nasdaq.
If the markets had not closed at 1 p.m. ET for the holiday, the damage might have been worse.
A trifecta of concerns drove investors to sell: The prospect of rising interest rates; global economic weakness; and the likelihood that the partial government shutdown will extend into next year.
Congress missed a midnight Friday deadline for getting a spending bill passed, resulting in a partial government shutdown. No votes are scheduled to end the stalemate until after Christmas.
(Excerpt) Read more at foxbusiness.com ...
The overall cause of the selloff in the stock market is concern that the global economy and corporate earnings growth is going to slow down substantially next year, because of rising interest rates and the trade dispute with China. In financial theory, stock valuations are determined by corporate cash flow, the cost of capital for a corporation, and assets and liabilities on the company's balance sheet. If earnings growth slows down while interest rates are rising, then the growth of cash flow declines while the cost of capital increases, and that brings down stock values. The general belief among insitutional investors is that tariffs and protectionism slow down global economic growth. Defensive year-end selling by hedge funds, combined with tax loss selling, has probably exaggerated the selloff substantially.
Concern about earnings growth slowing down because of rising interest rates reflects a misunderstanding in the markets about the impact of raising rates at this point in time. Higher interest rates slow the growth of new home sales and motor vehicle sales, and also limit the amount of mortgage refinancing to reduce mortgage interest payments. At the same time, higher interest rates greatly increase personal income from zero-risk investments in FDIC-insured bank deposits and bank CDs and US treasury money-market funds, on the short end of the bond yield curve. This increases demand for all kinds of products and sevices purchased by savers and retirees. One of the hidden causes of the so-called "Retail Apocolypse" was the massive loss of interest income by savers and retirees during the ill-advised ZIRP policy of the Bernanke and Yellen Feds.
After all the mortgage refinancing during the long era of ZIRP, there aren't many home mortages left to refinance, so there's not much benefit to keeping the Fed funds rates below 2.5. This is a judgment call, but I would say at this time raising the Fed funds rate up to around 2.8% (latest average FOMC target) will not slow down the US economy, because of the huge increase in personal interest income and resulting demand for service industries, retailers, and manufacturers of mid-ticket items. This should approximately offset the slowing impact on sales on new big-ticket items such as new homes and motor vehicles. The Fed has economic models and I suspect their models show that a Fed funds rate around 2.8% will not slow down US economic growth. In addition, our economy will be more stable and less dependent on the cyclical home-building and motor vehicles manufacturing industries.
Another cause of the last phase of this selloff was the inept floating of a possible pause in interest rate hikes and a new wait-and-see policy in the Wall Street Journal. Then the Fed didn't pause. The administration can't float an idea in the WSJ that the markets really like, and then not follow through on that idea. That bothers institutional investors greatly, and leads to more selling and loss of confidence in the administration. Inept manuevers like that one have to stop, and not happen again.
Based on everything I've heard and read, this December selloff was apparently exaggerated by some managers of large hedge funds, who reached a point in time when they decided they didn't have enough time left in 2018 to have a good year for their funds, so they turned defensive and starting selling stocks to raise cash and prevent a bad year for their funds. This selling by funds then caused more follow-on selling by individuals, along with usual year-end tax loss selling. One thing that will really help the stock market is simply to close the books on 2018 and end this defensive selling by hedge funds, and tax loss selling. We can't get to 2019 fast enough at this point. One last thing: the government shutdown has no signficant effect on the financial markets. Shutdowns have happened many times in recent history.
Suggestions
I think if would be helpful for one of the Fed governors to go on TV and just mention the points I made above about the benefits of higher interest rates on demand for service industries and mid-ticket manufactured products (e.g., sports goods and apparel), and mention that more personal interest income will make our economy more stable and less dependent on the cyclical home-building and auto industries. I would also mention that the Fed funds rate is still quite low historically for the current level of GDP growth and employment in the US. I wouldn't get into the idea that raising rates at this time does not actually slow our economy, because that goes against standard market beliefs and would just start a big debate with market gurus about economic growth, while distracting them from everything else the Fed governor said about the benefits of higher interest rates.
The biggest thing the administration can do to stabilize the stock market and high-yield bond market, and bring them back up, is get a good trade deal done with China, that solves our trade disputes with China and benefits America. Why is this so important? Well, because China's economy is the biggest source of economic growth in the world right now. China's economy drives the Asian economy and Asia, along with the USA, drives the rest of the world. Multi-national US companies get a large percentage of their earnings growth from China and the rest of Asia. The latest economic data from China was not very good and showed a significant slowing in retail sales growth and industrial production. The Trump team is apparently working towards completing a trade deal with China in March, 2019. It would be highly beneficial to the markets to move the completion date of that agreement forward into February, and announce a preliminary agreement in January of next year. The stock market is really bothered by the idea of slowing earnings growth while the cost of capital is rising. That's a loss of value on both sides of the equation and the markets are steadily marking down the value of stocks. A good trade deal, in America's interest, that opens up China's markets to US companies and rescinds the vast majority of tariffs on both sides, will eliminate a lot of the concern about slowing earnings growth.
I don't think there's any problem with the US keeping a tariff on steel and aluminum, but the steel tariff could be brought down to around 15% in exchange for concessions by China. News reports about a negative impact from higher steel prices are generally unusual cases of companies that are mainly just assembly operations, bolting together Chinese steel products, adding some US parts, and shippng the stuff out. In the vast majority of manufacturing companies, steel costs are insignificant compared to wages, salaries, payroll taxes, utitlilies, and capital costs of machinery and equipment.
Making a good trade deal with China, in the next two months, is the most beneficial action the Trump administration can implement to help the stock market and high-yield bonds. The Trump team doesn't need to rush, or appear to be reacting to the markets, but I would calmly speed up the process and make every effort to finish it by end of February. Hedge fund selling should subside greatly at the end of the year, and maybe the funds will learn some lessons and not be so aggressive and leveraged in the future. Starting next year, the markets will watch the economy and look for a good trade deal with China. If we get that deal done by February, then 2019 should be a good year for the economy and the markets.
Go Trump Team! MAGA, and Happy Holidays to all.
And that right there is long term disaster in the making for America. This is a sure-fire way to lose an empire.
China never follows through on deals, they always promise and don’t come through.
They’re socialists- they don’t have any interior limits on their power, and exterior limits are compromised.
Trump must, and will, carry this battle through.
Can’t live with China, can’t live without China.
Bongino’s podcast of today (Christmas) was all about this. And he had a different take. I don’t understand economics enough to know who is right.
Well there are a lot of companies using a lot of different strategies. There are a lot of mid-sized US companies that get over 90% of their earnings growth from America, and don’t do any business in Asia. But the multi-nationals, that are a big part of the stock indexes, get a lot of earnings growth from Asia. That’s because of the rapid growth of the middle class in Asia. We need to sell more products made in America into Asia, and that’s a big part of this trade negotiation.
I look forward to bongino’ podcasts every day
I COMPLETELY agree.
Two years in, and we are running the worst trade deficit with China between any two countries. In recorded history. Worst ever.
And it will get even WORSE this year.
Worst in history.
It’s complicated. There’s a difference between the US economy and the US markets. We’re such a self-sufficient country that our economy isn’t slowed much by trade wars. But other countries can be slowed down by lost exports and their inability to produce the lost imports resulting from a trade dispute. That then slows down the global economy and hits our financial markets, which can then feed back into our economy. So this is a long-term project to cut trade deficits, and vitally important. Going into a bear market in stocks doesn’t help our negotiating position and doesn’t help our President politically.
Left-wingers want a stock market crash and a recession so much. They’re all over the news media on this subject. I really want to see the market rally back, just to shut them up.
Whatever happened to the Plunge Protection Team? They usually show up to rig the stock market.
I guess taking Trump down is more important. The Administrative State doesn't want him re-elected.
The economy needs a recession, with fingers pointed at Trump, to prevent his re-election.
It amazes me all the forces arrayed against Trump.
Trump needs to up his game and start declassifying.
I fear it will get worse, with major sell offs between now and the end of the year. The Dow will be below 20,000.
I saw him live at politicon and he is awesome.
You probably will see this in January. I’m shifting all my money market, bonds and so on back to large caps as people will eventually buy. The issue is two fold:
1. Trump has bled China pretty badly (Shanghai stock lost almost 1/3 value in 6 months, people don’t like xis social management scale crap and China has turned back to the commie stuff of the 80s that kept their country poor. They’re on the edge of a bubble and trying really hard to keep people from being scared. A lot of manufacturers are building in Indonesia and Malaysia now.
2. People are afraid construction is going to collapse with these interest rates. 2.5% is nothing compared to the 90s, but we didn’t have subprime in the 90s really.
Extra: I think a lot of lefty money is dumping the market just to knock out Trump. The economy is too strong, though, and by March this will all be a memory.
I see it going below 15,000, potentially.
Back to where it was under Bam Bam.
I’m still too dumb to even understand your post. I am not sure which direction we should be going right now. Not understanding who or what drives our markets and which way is the right way.
I have heard distress expressed that this drop in stock values is going to hurt a lot of 401k holders. Is this true??
Only if they sell while the market is down. It will go back up.
It's a "buying opportunity" everything is on sale.
Well 401k accounts are long-term retirement accounts. If we manage our economy well and make good trade deals that cut our trade deficit by 50% or more, then our economy will do well in the long term. If that happens, 401k accounts will also do well, and this short sharp shock to the markets in 2018 will be long forgotten by 2020.
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