 The Market Sum | Insight after the bell
By James Early Friday's Headlines 1. Dow Takes a 621-Point Nosedive 2. Fed Chair Powell Promises to Act "Appropriate"—Instead of Lower Rates 3. China Fights Back With Tariffs; Trump Fights Back With Higher Tariffs 4. David Koch of Koch Industries Dies Markets Closed
Year-to-Date
 Markets Today
It was one of those days, and mostly for trade war reasons.
Fed Chair Jerome Powell, speaking from the Fed conference in Jackson Hole, Wyoming, didn't directly mention the rate cut that the market has all but bet its firstborn on, but he did wax relatively positive on the U.S. economy. The markets seemed to react positively to this. This Fed update was supposed to be the big news of the week.
But China also chose this morning to announce upcoming tariffs on $75 billion in U.S. goods—listing more than 5,000 items for retaliation. Such a move was presumably planned to steal the scene, and effectively did, but what the market ultimately fixed on was President Trump's response, which implied that he sees President Xi (and Powell, incidentally) as an "enemy" of the U.S. economy, and that he wants U.S. companies doing business with or manufacturing in China to consider moving their Chinese operations elsewhere.
Apple and Caterpillar, both seen as particularly at risk from the trade war, saw their stocks whacked 4.62% and 3.25%, respectively. And the much-watched 2-year/10-year yield curve inverted again on the worry.
Trump's initial remarks didn't amount to a specific plan per se, and it's not clear how feasible such a plan would be anyway, at least without major damage to the U.S. and global economies, but markets took both China's gesture and Trump's acerbic reaction as an indicator that the trade war is alive and well, and sold off accordingly.
Then, at 5 p.m. today (New York time, after the market closed), Trump got more specific: He tweeted that the forthcoming 10% tariff on $300 billion in Chinese imports will now become a 15% tariff, and that the $250 billion in Chinese imports slated to be tariffed at 25% on Oct. 1st will now be taxed at 30%. With days like these, it's little wonder the market has been migrating to bonds.  Graphic credit: BofA Merrill Lynch Global Investment Strategy
Powell Leaves One Thing Unsaid If there's a guy who feels like he can't win these days, it's Jerome Powell. Deciding interest rates for an economy that many feel is cresting after 10 years of growth—while enduring heavy criticism from the U.S. president—is one pressure. Another is that contrasting Trump's desire for a bigger rate chop, a number of Powell's colleagues are worried that conditions aren't quite bad enough for rate cutting, telling Powell that the Fed should save its dry powder. The market itself, in at least a nod to the Trump view, expressed its displeasure after Powell's noncommittal verbiage accompanying the Fed's July 31st 0.25% rate cut. Pressure from all sides.
Powell held his ground today, at least by remaining noncommittal. He didn't mention a rate cut explicitly. The current CME FedWatch Tool predicts literally a 100% probability of an interest rate cut at the Fed's September meeting; the only issue is how big a cut. General expectations—at least those bandied about in the media—were for some a nod to this, but instead, Powell more vaguely said the Fed would "act as appropriate to sustain the economic expansion."
In fact, Powell was largely positive about the U.S. economy in his talk, steering away from the topic of a recession (and the yield curve inversion), and noting that the U.S. economy was doing well on the price stability (generally meaning inflation near 2%) and employment, the variables the Fed is chartered to manage.
The market seemed to take this in stride, but dissatisfied with Powell's lack of gusto for cutting rates, President Trump tweeted: "the Fed did NOTHING!" and asked, "...My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?"  Graphic from CME FedWatch Tool
China Announces 5%–10% Tariffs on $75 billion of U.S. Exports Odd as Xi and Powell may feel to share the same penalty box, Trump's concern was clearly a response to China's latest volley in the trade war: tariffs of either 5% or 10% on some 5,078 items. Some start on Sept. 1st and some on Dec. 15th, obviously matching Trump's threat to impose 10% tariffs on $300 billion of imports on Sept. 1st, and his later extension of some of those tariffs until Dec. 15th. China's choice of items like autos, soybeans, and oil show the calculation on the Chinese side, as does the decision to release this news on the morning of the Fed's announcement from Jackson Hole, and the G7 meeting in France.
What's curious is that in contrast to China's currency devaluation—an economically small but symbolically important decision to let the yuan weaken past the long-protected 7:1 threshold versus the U.S. dollar, and a decision that rattled markets— this move seems like a deliberate effort to keep the trade war trade-related. One train of thought is that because the U.S. imports $540 billion in Chinese goods per year, and only sells $120 billion to China, China will run out of things to tariff much sooner than the U.S. would in a pure tit-for-tat. But this smells more of symbolism than of economics; it's likely more of a signal than a true strike.  David Koch Dies Lycra. Dixie Cups. Stainmaster. Brawny paper towels. Koch Industries produces all sorts of things Americans use every day, but it doesn't get much airtime unless something notable happens. Such as today, with the announcement of the death of David Koch, at age 79, who ran the company with his still-living 83-year-old brother Charlie.
This is because Koch Industries is the second-largest (behind Cargill) private company in the U.S. It's little-known, although its revenue rivals Microsoft's. What limelight the Koch brothers received tended to be shaded in controversy—start typing "Koch brothers" into Google and "Koch brothers evil" will pop up as one of the pre-filled search options—but the brothers' against-the-grain decision to keep the company private brings up an investing topic: the tradeoff between going public and staying private. A major reason that almost all companies of Koch's size are publicly traded is that going public means a big payday for owners. But it also means scrutiny. Lots of scrutiny. And that scrutiny often comes with a pressure to make good-for-the-short-term decisions. The logical extension, some say, is that investors may not have the patience to do what's in their own best interest in the long run. Some owners, especially of hard-to-understand businesses, or those with a proclivity for decisions that may not sit well with mainstream folks, choose to keep their companies private.
The Koch brothers were among them. When he died, David Koch owned 40% of Koch Industries, something that surely would not have been possible had the company been public.  What to Expect Next Week Investors have been watching manufacturing as a possible canary in the coal mine of a worsening global economy—because at least in the U.S., the consumer has held up well—and next week, we get more manufacturing-related data from both sides of the Pacific.
Monday we'll get durable goods orders, China's total industrial profits, and an update on what's going on with the G7 in France.
Tuesday, consumer confidence index data comes out.
Thursday, U.S. GDP growth for the second quarter gets released, as well the U.S. goods trade balance.
Friday sees three things: First, Chicago PMI. IHS Markit's PMI showed a slight contraction, so we'll see how the Chicago PMI looks in comparison. Second, China National Bureau of Statistics Manufacturing PMI, and third, core inflation, which the Fed (and Investopedia) will be watching closely.
Programming note: The Market Sum will be guest written until August 28th while Caleb is out for a little summer fun with his family.
chart courtesy www.koyfin.com  Shares of Salesforce.com rose by over 2% after its Q2 earnings and revenue beat market estimates. Newmont Mining's stock price climbed more than 2% higher today, following an increase of the company's short interest.  L Brands maintained its top spot from yesterday—its stock price having actually fallen further to over 9% today—following market analysts singling the continued struggles of Victoria's Secret as the main thing dragging its parent company down. Shares of Hasbro decreased by almost 9%, amid the company dropping $4 billion to buy Entertainment One, although a D.A. Davidson note on the purchase posited that the drop might have been overdone.  Although many countries suffered today, India actually did alright for itself, even when compared to the other three victors. Meanwhile, there were no winners in Europe and the Americas, with Brazil taking the heaviest loss. Word of the Day: Passive investing is an investment strategy to maximize returns by minimizing buying and selling. Index investing in one common passive investing strategy whereby investors purchase a representative benchmark, such as the S&P 500 index, and hold it over a long time horizon.
 Today in Financial History Aug. 23, 1976: Vanguard, the mutual fund company started by Jack Bogle, opens the first retail index investment fund available to retail investors, giving birth to passive investing. "Who would want average returns?" the then-chairman of Fidelity asked. A lot of people, it turns out: Not only did Vanguard's First Index Investment Trust (technically, its descendant) grow into the largest mutual fund in the world, but earlier in 2019, passive stock investing assets exceeded active assets for the first time.
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Friday, August 23, 2019
Nosedive
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