*Currency markets and Bitcoin trade 24 hours, the figures here indicate movements between 9am and 4pm ET #1 POOF!
Just like that, early morning market gains turned into deep losses as reports of new tariffs against the Chinese shook global investors. The DJIA had been up as much as 350 points earlier in the day, but swung 600 points and briefly entered correction territory before recovering at the close of markets. Bloomberg News reported that the Trump Administration may add tariffs on the remaining products not already covered in the first rounds of this growing trade war. Remember, Trump and China's Xi are expected to meet next month in Buenos Aires to work this out. But these warnings, if true, are not paving the way for a productive summit.
Why it Matters: An escalating trade war is just one of the major concerns weighing on investors right now. While there is justifiable concern about the impact of higher tariffs on both import and export costs, a trade war can bleed into other areas and deliver a bigger punch. China has been a very reliable buyer of government bonds for the last decade, especially U.S. bonds. One can easily see a scenario wherein they close their wallet and convince their favored trading partners to do the same. Suddenly, the Federal Reserve, which has gone from being a buyer of treasuries to a seller, has lost its most important customer. Add this to the worry wall.
We're at the Schwab IMPACT conference in Washington D.C. this week, which is one of the biggest gatherings of financial advisors, money managers and financial planners in the country. While this conference looks like many similar conferences with exhibitor booths, giveaways, and networking pools swarming around urns of bad coffee, there is a palpable sense of anxiety among the 5,000 attendees.
Remember, these are the people who are managing our money and helping us make life decisions that impact our financial futures. They are concerned because we are concerned. They take 25 calls a day from nervous clients who are wondering what they should do? Where they can hide? When will it get good again? There is, of course, no one size fits all answer to those questions. It depends on your age, your goals and your risk tolerance. But the fact that these questions trump all others tells you all you need to know about the fears permeating the investing world right now.
Investor sentiment can whip a market around pretty hard. The lows are lower, the highs are higher, and everything gets pushed to the extremes. Take a look at a daily chart of the S&P 500 over the past month and you'll see what we mean. The day to day is noisy. The 6-month trend is troubling and could get worse.  Schwab's top strategists, Liz Ann Sonders and Jeff Kleintop are all predicting a recession in the next 6-18 months. They anticipated the market correction we are currently experiencing at the beginning of this year and have been pretty spot-on with most of their forecasts to date. This is why they see trouble ahead: - The unemployment rate and the inflation rate are nearly the same. Three of the last four times that has happened, a recession has followed. It's the paradox of strong growth. A growing economy with low unemployment empowers companies to raise prices which triggers inflation, which triggers a slowdown.
- The gap between the 10-year treasury note and the 3-year treasury note is narrowing. Investors have a lot of confidence in short-term growth, but are more sanguine about our long-term prospects.
- The tariff war could escalate and cause a ripple effect into areas outside of trade. China was a pretty reliable buyer of U.S. debt for many years, for example. Pulling that plug could have untold consequences.
Recessions don't automatically trigger Bear Markets, as we have noted, but they are generally not good for stocks. For its part, Morgan Stanley sees no alternative but a Bear Market. In a note to clients this AM, strategist Michael Wilson writes: "It doesn't take heavy analysis to recognize this market is now approaching bear territory. Although the S&P 500 is only down 10% from its highs, 40% of US Stocks and almost every sector have fallen 20% at some point from their 52 week highs. We think the evidence is building and the message from Mr. Market is clear- The consensus outlook for earnings growth is too rosy next year." Goldman Sachs, on the other hand, thinks we may have bottomed and that stock buybacks and strong earning will save us. That's Wall Street for you…
What's Next: Trump's threats to drop more tariffs on Chinese goods right in time for the Lunar New Year are just par for the course and part of his negotiation strategy. We should not be surprised at this point. A trade war on its own is not enough to derail the global economy, but it is significant. It's the other factors that are more troubling in concert with a trade war. Slowing growth, slowing profitability, slowing productivity and rising inflation do not mix well. As Kleintop notes, 3 out of the last 4 recessions had those characteristics.
The good news for investors with long time horizons is that they have time to rebuild their portfolios and buy on weakness. Stocks also tend to bounce high during bear markets. Just as they fall hard on the way down, 6 percent or greater daily bounces are not uncommon during bearish times. We are not wishing for a Bear Market, but the ingredients are all in the pot and it's starting to boil. Allocate responsibly! Read More: 6 Trends That Could Cripple The Bull Market The Basics of Tariffs And Trade Barriers Digging Deeper Into Bull And Bear Markets #2 UK announces 'Tech Tax'
Britain says it will tax the revenue that tech giants like Google, Facebook and Amazon make in its country. British Finance Minister, Philip Hammond, announced the plan in his annual speech this morning, per Reuters, saying the following:
"It's clearly not sustainable, or fair, that digital platform businesses can generate substantial value in the UK without paying tax here in respect of that business"
Hammond and the finance ministry will only target profitable tech giants, and will leave startups alone. Per his proposal, which would be enacted in 2020, profitable companies would be taxed at 2 percent on the revenue they earn inside the country. That could add up to as much as $540 million per year, based on today's revenue figures.
Why it Matters: Britain is facing its own financial issues that will only be exacerbated if Brexit becomes a reality. Taxing tech companies is one way of reducing the blow of dropping out of the EU, but it won't be enough. For tech companies, Britain and the EU have not been very friendly or tolerant of their privacy abuses or 'mistakes'.
Levying a 2 percent sales tax is not as taxing as a multi-billion dollar fine for those sins, but it creates an unfriendlier environment for their global domination plans. As for paying their fair share of taxes, these tech giants aren't even close. According to The Guardian, Google, Amazon, Facebook, Twitter and eBay are paying a pittance of the revenue they earn on the island.  Chart of the Day: S&P 500 breakdown threatens long-term uptrend
While the analysis of lines drawn on a chart is hardly an exact science, investors often pay close attention when major trend lines are on the verge of being broken down. The long-term weekly chart of the S&P 500 is currently showing just one of those instances, as the index has just dropped down to a major trend line that extends back to the low of February 2016. That low connects with a low in October 2016 to extend right up to the current price.
Market technicians interpret this in a couple of different ways. For one, this trend line may be acting as 'support,' which could help prevent further declines in the price of the index. Aiding this interpretation are other indicators – like the RSI, MACD, or the Stochastics shown on the chart below – which are showing that the S&P 500 is at or near 'oversold' levels and could soon be due for a rebound. A much less optimistic interpretation of what's currently happening with the trend line warns of potential catastrophe if the line is fully breached to the downside. Such a breakdown could indicate a much bigger potential sell-off going forward, according to some technical analysts.
Monday's very indecisive price action has been the rule of late, and it's the type of market movement that frustrates analysts (and investors) to no end. When price was up sharply in the morning, it seemed that a trend line bounce would be a foregone conclusion. As markets sank in the afternoon, though, it now appears that a trend line breakdown may be a more probable scenario. In either event, it will likely take at least a few more weeks of price action to determine with more confidence whether the S&P 500 uptrend continues, or if a further breakdown turns into an extended market slide.  CONNECT WITH INVESTOPEDIA |
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