Well volatility is really back for good apparently. After a short hiatus after the February stock market correction Volatility came roaring back with a 724 point decline on the Dow Jones Industrial Average on March 23, 2018. It was the 5th largest single day point decline in the history of the Dow.
I hate that every stock market move gets dissected and analyzed to death. Markets go up and they go down. At the highest levels it is really that simple. Occasionally though there are moments that have to be analyzed at a deeper level to see if it is a trend to something bigger. The financial media would have you believe that we are heading to a second Tech crash (the first being 2001-2003) or possibly worse.
So let’s take a brief look at what’s actually going on so we can parse out the signal from the noise. Last week the FOMC (The Fed) had their first meeting under new Fed chair Jay Powell and it was very encouraging. As expected the Fed voted to raise rates by 0.25% taking the Fed Funds rate from 1.5% to 1.75%. The Federal Reserve also noted that they expect economic activity to pick up in the upcoming quarters, inflation to climb to its 2% target and to increase key interest rates three times in 2018. What we need to remember is that the Fed always forecasts inflation and more rate hikes than what actually materializes.
So Wall Street’s big temper tantrum had nothing to do with the Fed. That’s great so what did it have to do with? The political media and the financial media have been on a collision course for the past month or so over two big issues: Tariffs and Privacy. On both issues the media is doing exactly what they do. They are blowing them out of proportion.
I’ll start with the tariff issue first. Tariffs are not all bad and have been used by countries around the globe forever. In 2011 President Obama instituted a tariff on tires. This tariff was a debacle for many reasons but if you look back at the media during that time they were mostly quiet about the idea that the Tire Tariff would create a trade war or push the US economy into another recession. Now President Trump has decided to install a 45% tariff on the imports of steel and aluminum as well as a proposed $60 billion intellectual property tariff against China on certain goods.
The Steel and Aluminum tariff is not a long term solution to the issues that face the metals companies in America. We have a long history of putting tariffs on steel at different times. The problem right now is there is a global glut of steel supply that is driving prices down and it is being driven by foreign producers of steel who don’t care about the price since they have the financial backing of their governments. The low prices cause smaller producers here in the US to go out of business because they can’t remain profitable. The Obama administration had tariffs on Steel for a period of time but it is not a long term solutions to the issues in this industry. Now it remains to be seen if the Trump Administration can negotiate a longer term fix but at almost $50 billion a year this industry is important but is merely a blip on the overall US economy.
Will this spark a trade war? If we have learned anything about President Trump during his first year in office is that his negotiation style is to push hard out on the fringe before coming to the middle where the true deal lies. With that in mind we believe that this hardline talk on tariffs is purely a negotiating tactic. It’s our opinion that will not be the case but it is a possibility that warrants us keeping an eye on but we believe that market has overreacted to the potential risk.
Now onto what I believe is a bigger issue, Privacy. There has been a ton in the news recently about Facebook and Cambridge Analytica and how technology companies use the data that they collect on each of us. Privacy is a double edge sword. By giving up some of our privacy we have gained tremendous convenience, efficiency and productivity. Now unfortunately with every step towards progress there are trade offs. Everyone who has a smartphone, Alexa, home computer, or smart device has already traded their privacy. It was in all of those user agreements we so diligently click through to get to whatever app we want to use. My Dad used to say that there is always someone watching. That was probably not true in 1989 but it is definitely true today.
Tech companies like Facebook have been granted unfettered access to data about every aspect of our lives. And they have had little government regulation around how they can use that data. That’s the scary part and should be seriously looked at. As we have seen with the Equifax scandal all it takes is one bad actor to make all that data a massive weapon. I am certain we have not seen or heard the end of this privacy issue.
One more point of interest coming out of Washington is the passage of a $1.3 Trillion discretionary spending bill. Just a reminder the discretionary spending bill does not include Social Security, Medicare, Medicaid and interest on federal debt. While the administration has done a tremendous job of cutting regulation which is very pro growth they can’t seem to reign in spending. In fact they are spending at a pace that is about 7% above last year (First Trust).
We are still sticking to our story from earlier in the year where we will see more market volatility but that improving fundamentals, earnings and economic data will ultimately continue the stock markets march higher. Ignore the noise of trade wars, tech problems, government spending or whatever will come next. The signal is still strong.