Last week introduced a new variable into the analysis:
Not surprisingly, the markets declined. The bigger question is, now what?
We are seeing another drop this morning. The question is, will the 100-day moving average on the S&P 500 hold support again? If not, we’re looking at the 200-day moving average, which in about 100 points lower from here. Why do we always use the S&P500 instead of the Dow Jones? Well, very simply, the S&P500 represents 500 companies which is a more diverse representation of American business as the Dow only represents 30 companies.
Unfortunately, there’s little technical indication which scenario is going to play out. Given the continued shift in sentiment with ever-increasing anti-globalist policies out of the White House, the possibility of a bigger sell-off is out there — even with decent overall fundamental economic data.
A 40% reduction in the federal income tax rate for corporations (shareholders) is bullish. It takes capital away from the wildly inefficient federal government and keeps it in the most productive hands in history. Often tariffs are crony-capitalism at its worst. Anti-free-market measures hurt economic growth. While tariffs may help the chosen ones (temporarily), they adversely affect many more. Most tariffs are taxes on the end consumer and just one-layer-deep thinking. I suspect this may be posturing as the NAFTA talks are being held in Mexico this week. This added to the chaos inside the White House, Congress, the Fed, the FBI and the media, and it is no wonder the markets are confused, and volatility has returned.
Overall, current fundamental data is still good. At this point we must continue to look past the news du jour and focus on the longer-term fundamentals of a growing economy. The very low interest rate party may be coming to an end. Yet the possibility of 3 to 4 rate hikes over the next year isn’t going to take us to nosebleed level interest rates. The fact that rates can be pushed up by the Fed is an indication the economy IS actually doing well today.
A modest pullback after coming off a strong year and a parabolic move up in January isn’t the end of the world the news media would have one believe. Eventually, trillion-dollar deficits are going to matter, and rising interest on the national debt is going to be felt. However, I don’t see it coming to a head anytime soon. As for the current news cycle of tariffs spooking the market, one of my dear clients always told me “This too shall pass.”
Quote of the day:
“In my experience there is no such thing as luck.”
– Obi-Wan Kenobi