August 24th 2015 the S&P experiences a one day sell off of 4%.
Volatility is back. It has essentially been absent from the landscape for more than 2 years. Some are confused, most feel some level of concern and there are others that are convinced this is the beginning of the next bear market. From banks to industrials to healthcare and the technology sector, the latest round of volatility has touched about every segment of the stock market. Seems like the tax cuts are a distant memory having been replaced with fears of a rising fed funds rate, trade wars, Facebook’s sell-off and the most recent failure with an Uber driverless car. I’ll take a brief look at each and then finish up this edition of Market Update with my latest assessment of the market.
The federal funds rate is the interest rate banks and credit unions charge each other overnight on uncollateralized assets. Simply put it keeps lending institutions solvent day to day. Our economy is doing quite well right now. Raising this rate makes overnight interest payments higher, causing bankers to be a bit stingier in granting loan requests. Essentially that helps to keep the economy from growing too fast which can cause higher prices thus higher inflation. Right now, a rising fed fund rate is affirmation our economy continues to strengthen.
In today’s globally connected economy a trade war is a very unlikely way to achieve trade balance. According to the Wall Street Journal the US imports just over 2% (read that again) of the steel used in this country from China. On the other hand Canada, Brazil and South Korea are our biggest suppliers of steel at roughly 40% combined. So in retaliation to President Trump’s proposed 25% tariff on China’s 2% steel, this past Wednesday China imposed $3 billion in tariffs on $172 billion worth of US imports such as cars, whiskey and soybeans to name a few according to the Journal. Read that one again too and do the math. At this point I see this as nothing more than posturing by Presidents Trump and Xi.
Facebook has been exposed as having weaknesses in how it protects user information as Cambridge Analytica retained information from some 50 million Facebook users during the 2016 US Presidential election. On March 18th a driverless Uber struck and killed a 49 year old woman in Arizona. Although the two are completely different, unrelated incidents they sadly expose how vulnerable we are to the faith and dependence we’ve placed in technology. Facebook shares have tumbled 18% in the last 3 weeks dragging down the entire technology sector which, as of the date of the writing is down 11% since January 26th. The Facebook and Uber incidents will likely lead to increased Government oversight in the sector. None the less, that won’t lessen our need or reliance on technology let alone hold back growth in this sector.
So do the above events represent the foretelling of a bear market or recession or are they representative of risk factors associated with the current market cycle? Anyone that reads my periodic newsletter knows that I follow a variety of market trends and publications that, in my opinion, help me to discern stock market direction. One publication that I read faithfully is the Institute for Supply Management or ISM report. Put out monthly, it is one of the most accurate tools to measure where our economy is at present while providing me a basis for where stocks might head in the coming 6-12 months. In short, the fundamentals driving this bull market remain intact; current trends along with the latest ISM report confirm to me this bull market remains in place. What we’re seeing right now is a healthy dose of volatility.
To be clear, I take the events of the last 2 months very seriously. If nothing else it forces a second and third look at trends and a re-examination of the data. I get the fact we’re now heading into the 10th year of this bull market, that it’s getting long in tooth and many of us (including some industry pundits) have one eye in the rear-view mirror. I simply don’t see the events of the last 2 months as anything more than volatility rearing its ugly head after a long pause. And I think you should expect it to remain throughout 2018.
By the way, that one day sell-off in August of 2015 highlighted at the top of this piece was caused by China’s currency revaluation. Interesting isn’t it. China was a part of the volatility equation then just as it is today.
Until next time…………………………stay nimble, be tactical and know what you own.
These are the opinions of Randy L Miles, Sr. and not necessarily the views of Cambridge. They are for informational purposes only and not to be considered as personal investment advice.