This week’s trading sessions have been one for the history books.
President Donald Trump had been touting the strong stock market performance since his election win but had yet to deal with a significant market pullback.
Until last Friday, February 2nd, the Dow had been up more than 30% since the 2016 presidential election. And on Monday, February 5th, a White House official stated its worry over the massive market sell-off.
Have the markets finally reached correction territory?
What’s Happened
Following February 2nd‘s 666-point plunge, the downdraft in stocks snowballed into the next week with the Dow briefly going into a free fall.
Last week’s sell-off was sparked by inflation fears and worries over interest rates rising faster than expected.
Those fears stemmed from a strong employment report released on February 2nd, which showed that wage growth for hourly workers had risen nearly 3% over the past year — its quickest pace since 2009.
The fear is that the Federal Reserve, which has signaled that it will raise interest rates three times this year (or a total of three-quarters of a percentage point), could instead be forced to hike rates four times (or 1% in total) in an effort to slow the economy down.
Asian and European stock markets also dropped at the start of the week after the U.S. suffered its worst trading day in two years on February 2nd.
Fears of contagion risk subsequently spread to Asian markets, with Hong Kong’s Hang Seng Index (HSI) falling 2.7% on Monday, the Tokyo Price Index (TOPIX) dripping 2.2%, and the Korean Composite Stock Price Indexes (KOSPI) going 1.3% lower.
The Asian sell-off was also fueled by concerns that the recent rally could be faltering after investors bought $7.9 billion worth of Asian and emerging markets funds at the end of January.
In addition, Germany’s Deutsche Aktien Index (DAX) was down 0.88%, while the French Cotation Assistée en Continu (CAC) 40 was 1.07% lower after the U.S. index’s downturn.
At its worst, the Dow sank close to 1,600 points in the largest-ever intraday point decline.
Benchmark indexes plummeted during Friday’s and Monday’s sessions. The Dow shed more than 1,800 points, and the S&P 500 lost $1.5 trillion in market cap.
Wall Street’s two-day sell-off shocked markets inured to record highs and steady gains.
The Dow and the S&P 500 ended January will their best monthly rises in 22 months. It was also their best start to the year since the ’90s.
Matt Maley, equity strategist at Miller Tabak had this to say about the market’s behavior:
I think what happened was the market went too far, too fast. Momentum-driven trades took the market higher than it should have gone given the tax breaks. …You’ve got to calm down a little bit.
But Wall Street’s recent swings are an uncommon sight after years of low volatility.
Before Friday, the Dow hadn’t seen a decline of more than 500 points since Jun 24, 2016, when a surprise “yes” Brexit vote rocked global markets.
On Monday, the S&P 500 broke its longest streak on record without a 5% correction — an achievement it made last October.
The days’ losses were enough to erase all year-to-date gains for the S&P 500 and the Dow.
The S&P 500 is now down 0.9% in 2018 and has removed 8% from its all-time closing high set on January 26th.
The Dow ended the session with yearly losses of 1.5% and has gapped 8.5% from its high set on the same day just weeks ago.
The indexes are just another drop away from entering correction territory…
The End of the “Trump Bump?”
As the stock market spirals downward in what economists see as the first major correction of Trump’s presidency, the White House is leaning on one phrase to try and soothe concerns: the fundamentals of the economy are “strong.”
As stocks around the world tanked, Vice President Mike Pence told reporters early Tuesday that the sharp decline was “simply the ebb and flow of our stock markets…”
He suggests the underlying economic data for the U.S. is fine.
The Dow was slightly positive in early trading on Tuesday. But the bounce back followed a record point drop for the index and a significant sell-off in global markets.
Indeed, corporate earnings are still strong, wages are rising, and job growth is steady — but there are still some potential trouble spots that have the markets spooked.
It appears that inflation could return to the economy after a long period of dormancy, which presents a longer-term fear of the Federal Reserve interest rate hike and possibly a slowdown in overall economic growth.
While none of this presents short-term danger, there remain concerns that some of Trump’s policies — such as increased trade protectionism — could exacerbate the issue.
No president in modern times has connected his political fortunes to the stock market as much as Trump has. The president has relentlessly cited its rise as a sign of his success at restoring confidence in the American economy.
But the drastic sell-off Friday and Monday demonstrated why most presidents scrupulously avoid talking about any changes in share prices. Per the New York Times: If you live by the Dow, you die by the Dow.
Last year, barely a week passed without Trump crowing about the skyrocketing market, making it a major talking point for his case to the country that he had, indeed, made a difference. He took credit at least 25 times in January 2018 alone.
Even when the Dow fell over 300 points on the day of his first State of the Union, Trump simply ignored the drop and talked about how the market was continuing to break one record after another since he’d been elected.
White House press secretary Sarah Huckabee Sanders issued a written statement in regard to the market’s current status:
The President’s focus in on our long-term economic fundamentals, which remain exceptionally strong, with strengthening U.S. economic growth, historically low unemployment, and increasing wages for American workers. The President’s tax cuts and regulatory reforms will further enhance the U.S. economy and continue to increase prosperity for the American people.
However, those tax cuts may actually be contributing to the market’s decline. Rising wages, full employment, and tax cuts are all well and good for the Americans receiving them, but investors worry that they could be a sign of possible inflation and higher interest rates.
Instead of fueling growth, it just might do the opposite — prompting the Federal Reserve to raise interest rates more quickly to keep a lid on inflation.
Before Trump’s fiscal plan even has a chance to kick in, investors have drawn the conclusion that the economy is in serious danger of overheating.
While the Dow did close at its lowest point in months, the market as a whole remains well above where it was before Trump was elected.
It’s a definite that the “Trump bump” has deflated some. But it also looks like we’ll have to wait and see how the market will continue reacting from this point on.
That’s all for now.
Until next time,
John Peterson
Pro Trader Today