foxex: Message from the Mountaintop

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. Stocks Sink on Global Growth Concerns

Markets Close

Dow
24,404.48 -1.22%

S&P
2,632.90 -1.42%

Nasdaq
7,020.36 -1.91%

VIX
20.8 +16.85%

INV Anxiety Index
99.8 Neutral

US 10-Yr Yield
2.73 -1.94%

Markets Today

Stocks sank today...by a lot. The DJIA, S&P 500 and the Nasdaq all fell more than one percent, and volatility was back in fashion. (James has the goods on that in our chart of the day).

The narrative in financial media is that investors were scared by the cancellation of a trade meeting between the U.S. and China and slowing global growth. There isn't a lot of intel on why the trade meeting was called off, but optimism for a trade deal has been boosting stocks since the beginning of the year. We knew the road to compromise won't be a straight one.

The fears about a global growth slowdown are another matter.

Those fears are not new, of course. The U.S. economy, while relatively strong, is poised to grow about 2.5% for the next couple of quarters if -- and it's a big 'if - the preposterous government shutdown, now in it's 32nd day, doesn't continue for much longer. China's economy, as we know, is slowing down and is expected to grow 6%, down from 6.5%. Europe is a big question mark given Brexit, but the latest projections from the EU are for growth in the 1.9% - 2.1% range in 2019, and slowing a bit more in 2020. So...why is the fear surfacing today?

Blame it on Davos

The World Economic Forum kicked off in Davos, Switzerland today. If you have never heard of it, think of it as Lollapalooza for industry titans, well-heeled academics, political celebrities, and hedge fund royalty. They are all being followed around by quote-hungry journalists who publish their every word as gospel. I've been there and I am guilty of this relentless pursuit of access journalism.

To be sure, the WEF has noble intentions. This year's themes include 'Protecting our Planet", "Shaping the Future of Food", "The Fourth Industrial Revolution", and other heady topics. These are all worthwhile conversations, but the noise the rest of the world hears from the Swiss Alps is the sound of Fortune 500 executives and hedge fund captains either expressing confidence or forecasting trouble ahead. One day into the Forum, and we're getting a lot of the latter.

Here is a sample:

Billionaire investor Seth Klarman issues dire warning on economy (CNBC)
The next economic downturn scares me most: Ray Dalio (CNBC)
Ray Dalio has told us the same thing in this video if interested.
Executives in Davos put on brave face despite jittery mood (WSJ)

You get it. It's not just happening in Davos, either. Johnson & Johnson (JNJ) reported earnings today and forecast slowing growth due to global demand. Apple said the same thing a couple weeks ago. You know who else is feeling squeamish about the economy? Americans.

In a recent Gallup survey, the percent of Americans who think the economy is worsening climbed to 48% last week, up from 36% in November.

Why it Matters

Consumer confidence is the carbohydrate that fuels the economy in the U.S. and other developed nations. Consumer spending makes up two thirds of our GDP in the United States. So when we lose our mojo at the mall, investors look for opportunities to sell. When the lack of confidence is amplified by business leaders and policy makers sending out dire warnings from the lush confines of a Swiss Alps resort town, it echoes around the world.

The trade tensions with China factor into confidence, for obvious reasons. Should negotiations falter, higher tariffs will be passed right on down to consumers in the form of higher prices in the U.S., China and around the world. The general consensus is that cooler heads will prevail in D.C. and Beijing, but time will tell. Circle March 1st on your calendars, since that is the deadline both sides are targeting for an agreement.

Still, trade tensions are so 2018... 2019 may actually be the year of the Tax War. Jeff Kleintop, Chief Global Strategist for Schwab, writes about a 'race to zero', as countries seek to lower tax rates in order to compete for investment and a larger share of global growth. The U.S. enacted a sizable tax cut in 2018 that boosted growth and pushed the stock market to multiple records. As other developed countries face slowing growth, they are starting to play the same game, as the chart below illustrates.

This type of fiscal policy stimulation may be the only ammunition countries have on hand in the battle to jumpstart growth. With interest rates at very low levels (historically speaking) around the world, monetary policy solutions are exhausted.

China is also dealing with falling tax revenue, which has certainly impacted its growth. It may be one of the main reasons it has been showing signs of compromise in the trade negotiations.

We know what happens when China's economy slows - see Apple. If the message from the mountaintop in Davos Switzerland is that growth is slowing and something scary might be lurking around the end of 2019 and into 2020, buckle up for more volatility.

If Schwab's Kleintop is right, we'll see more tax cuts around the world, as well.

Tuesday Headlines:

Amazon Knows What You Buy. And It's Building a Big Ad Business From It (NYT)

We know the deal. Big tech has lots of our data, and they sell it. The difference here is how unambiguous that database is - it's what you buy. It's becoming Amazon's third piece in a holy triumvirate - retail, cloud computing, and ads.

F.T.C. Is Said to Be Considering Large Facebook Fines (NYT)

Add it to the list of bad news for Facebook.

How Companies Secretly Boost Their Glassdoor Ratings (WSJ)

Investigative work from the WSJ.

Chart of the Day: Volatility Averages Remain Near Multi-Year Highs

With Tuesday's sharp drop in the markets, investors have been reminded of the fact that market volatility is still stubbornly high, and has been this way since October. Since the sharp rise in volatility back then, the VIX (or CBOE Volatility Index, also known as the 'Fear Gauge') has not dropped below 16, and has occasionally risen much higher than that. A prolonged state of high volatility as reflected in the VIX underscores a fear that continues to effect markets. A quick look at our own Investopedia Anxiety Index (IAI) confirms this fear. On Tuesday, the Market component of the IAI flashed "High Anxiety" at a significantly elevated level of 103.25.

Perhaps more telling than the raw VIX number, however, are certain moving averages that we use to extract more meaningful context from the index. On the chart above, we've plotted both the 50-day and 200-day moving averages of the VIX. As their names suggest, these moving averages provide a running average of the VIX level for the past 50 or 200 days. Earlier this month, the 50-day moving average hit a high around 22.3, which was higher than it's been since February 2012. The average is slightly lower now at 21.7, but it's still higher than it's been since March 2016. As for the longer-term 200-day moving average of the VIX, it's also holding high at around 16.6, which is higher than the average has been since September 2016.

So what does all of this tell us about investors' fear? Because markets are in a prolonged state of historically high volatility (despite the sharp rebound and recovery from late December), investors and institutions are likely more apt to sell indiscriminately at the first smell of trouble. We've seen a lot of this type of selling in recent weeks and months when rumors or bad news surface. So as we've been cautioning for the past few months, this means that caution and prudence should be exercised even more than usual in the current market environment.