From Bloomberg: It wasn’t smart to dump a dovish Fed chief, run up the deficit, and start a trade war. Trump did all three.
Although Barry Ritholtz is a liberal and we probably would not agree on much politically, I agree with his investing philosophy and find his non-partisan, strait-talk insight to generally be valuable. He says to not let politics dictate your investing decisions, and I agree. Although I was not a fan of Obama, I remained invested in the market, and given the strong performance it paid off handsomely. Had I heeded Glenn Beck, Alex Jones, Rush Limbaugh, Zero Hedge, Peter Schiff, and others, I would have sat out on the longest and biggest bull market in history and missed out on 270% gains. That would have been ideologically principled, yes, but also financially stupid and I would have nothing to show for it but being a lot poorer. Not to mention, the aforementioned people and names made tons of money during Obama and Trump’s terms fanning the flames of partisanship and division while pushing overpriced gold, “survival seeds”, and other products of dubious quality on their listeners, so they are profiting from and contributing to an increasingly polarized polticial landscape and are not without culpability. Same for the left, too, such as The Young Turks and their smug-style of liberalism that presupposes a false sense of intellectual superiority.
Anyway, enough with that. I disagree to some extent with Barry here:
I assumed that Trump’s aggressive style, economic ignorance and personal peccadilloes wouldn’t leave a lasting mark on either stocks or bonds. Now, roughly two years later, the chaos surrounding this presidency proves that was wishful thinking.
Given how much the market surged after Trump’s win, we would expect some volatility eventually. Markets do not go up in a strait line. Those who criticize Trump for market volatility now are overlooking the fact that the S&P 500 is still 25% higher since he was elected. Had you sold your stocks after Trump won, you would have missed out on a lot of gains. For the Trump doubters to be vindicated, the S&P 500 would have to fall much, much lower, all the way back to where it was on election night, which is 25% lower than it is now.
Higher interest rates: Trump replaced Janet Yellen, a dovish Federal Reserve chief (whose policies he liked), with hawkish Jerome Powell, whose policies he dislikes. Rates have gone higher, and it is the proximate result of the president’s appointment.
There is no one else to blame for this mistake but the president. Powell’s leanings were well known; so too were those of Trump’s appointment for vice chairman, Richard Clarida.
Barry is wrong here. Trump or any president cannot control what the fed does. Trump hopes the fed is accomodative, but that is out of his hands. The bond and stock markets were optimistic about Powell. If Powell was such a hawk, the bond markets would have tanked when Trump nominated him, but the bond markets actually rallied. Second, Powell is raising rates in accordance to forecasts made in late 2016, so it’s not like rates would have been lower under Yellen. After Trump won and the stock market began to surge, the economy recovered, and the bond market fell, interest rate forecasts increased to 3% by 2019, which we’re on track to hitting.
• Global recession concerns: Rising rates have helped push the yield curve toward inversion, with short-term rates higher than long-term rates. At least the five-year and the two-year Treasuries have inverted; the classic recession warning is when yields on 10-year and the two-year securities invert.
Because 10 and 30-year yields are so low to begin with, historically speaking, it does not take much for an inversion. This does not imply recession. During past inversions, the 10 and 30-year yields were above 6%. Now they are just 3%. Also, as mentioned above, the fed’s interest rate hikes are in-line with expectations.
Now, we see broader signs that global growth is slowing. Corporate profits may have hit a peak. 1 Economies are cyclical, and the U.S. has gone almost a decade without a recession, roughly two times longer than the average interval between slowdowns. That implies we are overdue for a slump. None of the usual signs of an imminent recession are present, but 2020-21 isn’t an unthinkable time line.
But Barry needs to take into account that the economy grew a lot during Trump’s first two years. If the economy enters recession, that does not imply Trump caused it. The media is acting like the economy is slowing, but GDP it still hitting its 3-4% targets. For recession to happen, GDP must first slow, and then go negative, and then stay negative for two quarters. We haven’t even hit the slowed phase, so it’s pretty presumptuous so expect a recession when there is no evidence of it. Because we’re talking about statistically independent events, the fact that it has been a long time since the last recession does not make a new recession more likely.
• Tariffs and trade war: Yet another self-inflicted wound seems to have taken place in the aftermath of the G-20 summit in Argentina. Trump announced a ceasefire in the trade dispute with China. Equity futures rallied strongly a week ago on Sunday night.
Yes, this is Trump’s fault. But I stand by my earlier prediction the tariffs will not hurt the economy.
The president sandbagged Wall Street. Despite his well-known casual relationship with the truth, traders naively assumed the president wouldn’t mislead about something as crucial as the resolution of an expanding trade war. By the time the president declared “I am a Tariff Man,” he had lost the trust of traders.
Yes, calling himself a tariff man was sorta a dumb thing to say, but it can be dismissed as hyperbole. Trump pays very close attention to the stock market (which is why he tweeted about it so much in 2017), and if it keeps falling he may reverse course in time for the election. He can call the tariffs off anytime he wants.
To be sure, these are not the only factors behind the stock-market sell-off. Rising deficits have spooked bond markets; enthusiasm about the large corporate tax cuts passed in December 2017 has faded; the strong dollar is often cited as a headwind for corporate earnings; U.S. stock valuations remain rich; China’s economy has slowed; Brexit is problematic, and the rest of Europe has more than a few messy problems. Any combination of these could be contributing to market volatility.
A strong dollar however negates the potential inflation of the tariffs and lessens risk of trade war. Deficits have been big forever. People have been predicting a debt crisis for over a decade to no avail. Deficits were big during Obama’s terms and that did not stop the economy and stock market from rising. Debt size does not matter. What matters is ability to pay interest, interest rate, demand for debt, and size of economy relative to debt. A country with reserve currency status can issue debt for very little cost and without creating much inflation. That is why Spain, Italy, Greece, Brazil, and Turkey’s debt problems are much worse for their economies than America’s debt even though America has a much bigger national debt.
The funny thing is, as shown below, in 2001 the economy entered recession despite Clinton’s much celebrated surplus. During the late 90’s, in spite of the surplus, all sorts of economic metrics began to fall, such as GDP growth and profits & earnings.
Yeah, stocks are somewhat overvalued, but as the late 90’s bubble shows, they can go much much higher. Valuations are not a reliable indicator given the lack of data points and the fact that valuations are influenced by many variables. As long as profits & earnings keep growing and GDP keeps risings, there is no reason to expect stocks to fall for any prolonged period of time. Also, low bond yields and low interest rates makes riskier assets such as stocks and real estate more attractive relative to cash and treasury bonds, so this can further boost valuations.
As expected, China’s GDP growth rate has been slowing since 2008. A 16% inflation adjusted growth rate is unsustainable. Yet the S&P 500 has gained 70% since then.
Brexit has been ignored by the market since 2016 and the economic impact on the U.S. has proven to be non-existent despite all the hype and also the fact it hasn’t even happened yet and probably never will.
That said, we are nearing the halfway mark of Trump’s presidency. Those waiting for that pivot toward his being presidential have been disappointed. Instead, they are now extrapolating his policy errors forward, and finding a significant and negative affect on the U.S. economy and stock markets.
Half or 1/4?
I’m not in the business of making forecasts, so I will pose a question: Does anyone think it gets better from here?
My prediction is, things get better.