Beware, The Ides of March
By Jon Aldrich
We are probably all familiar with the famous quote “Beware the Ides of March” from Shakespeare’s tragedy of 1599 Julius Caesar . It was a warning that a soothsayer gives to the Roman Leader, Julius Caesar, to let him know that his life is in peril, and he may want to stay home and beware when the date, March 15th, known as the Ides of March arrives. It was a catchy title and even though we are past March 15th, it made sense because of the stock market histrionics this past week.
As I have cautioned several times before over the last several months, we have been expecting 2018 to be choppy and a far cry from 2017 and so far that has been spot on. A trifecta of news including escalating trade war possibilities with China, Facebook’s major breach of trust and the worry that the Federal Reserve may eventually raise interest rates too far has the market seeing red again.
Let’s delve into each of these just a bit and try to make some sense of why these things are getting the markets riled up:
Trade Wars are not good for the economy or the markets and a stock market that has believed President Trump to be a tailwind with his pro-growth policies is now perceiving him to be a headwind because of his unpredictability and tendency to throw common sense out the window and embark on a Trade War with China and slap tariffs on steel and aluminum. There really is no winner should a trade war break out between the US and China, so both countries should try to avoid at all costs if possible.
From a recent Forbes article by John Brinkley:
The last trade war the U.S. got into resulted from passage of the Smoot-Hawley Act of 1930, a virulently protectionist law that raised tariffs on all manner of imports. It was a disaster. Other countries retaliated with tariffs against U.S. goods. Imports and exports plummeted. Banks and companies went out of business. Unemployment went up. Most economists agree that Smoot-Hawley made the Great Depression worse than it would have been had Congress not passed the law. Anyone with even a passing interest in trade policy knows about Smoot-Hawley. That seems to exclude Trump.
True, the economy was already in tough shape in 1930 when the Smoot-Hawley Act was passed, so I don’t subscribe to theory of banks and companies going out of business, but it will most likely have an impact on the economy and that is what the stock market is getting uneasy about with the recent tariffs and escalating trade tensions with China.
Facebook is not getting many “likes” these days with news that 50 million Facebook profiles were harvested without permission by the research firm Cambridge Analytica to build a system that could profile individual US voters to target them with custom personalized political advertisements during the 2016 elections. Facebook is at blame for a lot of this because the company knew in 2015 that this information had been harvested but failed to notify Facebook users and took very limited actions to secure the information of more than 50 million Facebook users.
So, why is this affecting the markets? Because a handful of technology stocks, known as the FANG (Facebook, Amazon, Netflix and Google) have been driving much of the gains in the market the last several months. Now, Facebook and the other FANG stocks are getting hit hard because of the prospect of much more government regulation of technology companies that could crimp future profits and when there is a possibility of profits going down, markets become unhappy.
FEDERAL RESERVE AND RISING INTEREST RATES
Jerome Powell, the new chairmen of the Federal Reserve presided over his first regular Federal Open Market Committee (FOMC) meeting and announced that they were raising short term interest rates another quarter point. This was expected as the economy is hitting on all cylinders right now, and they would like to continue to get interest rates up to a more “normal” level so that when the next recession does hit, the Federal Reserve will have some “ammunition” to lower rates should the economy start faltering.
Rates are still low by historical standards, but the Federal Reserve has a history of raising rates too far and which can tip the economy into a recession. In his news conference, Powell reiterated that they are foreseeing a total of 3 quarter-point rises in interest rates in 2018 as was expected. But, the part that might have riled the markets on top of the other news was that he raised the projection for 2019 to three interest rate hikes, up from the expected two. This stoked some investors worries that the Fed will again raise rates too far which could lead to a recession down the road in 2019 or 2020 and the reaction is shoot first and ask questions later.
WHAT’S THE BIG PICTURE?
Markets have been a bit uneasy since the sharp, late January early February long overdue correction and the combination of the three news events mentioned above have tested the markets patience again. However, the recent volatility should not really be unexpected, as often after a correction in stocks, the market will “re-test” the lows put in from the prior selloff. (See the chart below of recent price action of the S & P 500). You will routinely see that after the market gets close or even a little bit lower than the prior lows, it starts to rebound.
Also note, that the S & P 500 is now again just back to where it was in November of last year, so we should put things in a longer-term context. On the other hand, bonds have also had some struggles of late as well, so it has been a bit unusual that stocks and bonds have both hit a rough patch at the same time. This does happen occasionally.
The good news is that stocks almost never go into a bear market without an accompanying recession. The economy is really humming right now, and the recent tax cuts have only helped. The economy is nowhere near a recession currently. If cooler heads prevail with regards to trade wars and instead of escalating tensions between the U.S. and China, (hopefully some kind of agreement can be reached), you will likely see the market respond favorably.
Finally, after the incredibly docile year 2017 was in the stock market, we were more than overdue for volatility in the markets to return. As I have said, countless times before, try not to get too wrapped up in the news media and their panicky tones and “Markets in Turmoil” specials, but rather, find other more relaxing endeavors to embark on and leave the news media and talking heads to scream at themselves.
Oh, one more thing, if they do trot out that “Markets in Turmoil” special, you can be pretty sure that the bottom is in and things will start improving.