Tuesday, February 6, 2018

Here comes the Trump Slump - Mournday mourning stock decline is 'worst in history'

From the 538 Significant Digits email:
4.6 percent
The stock market is enjoying a bit of a correction, with the Dow Jones Industrial Average falling 4.6 percent on Monday, with a 15 minute period of yesterday seeing the Dow selloff hit 1,597 points. [Bloomberg]

It sure looks like that The Donald, having boasted about presiding over a Trump Bump, is now faced with leading the nation into a Trump Slump. The NY Times reports Monday that Stock Markets Tank, Deepening Losses. Snippets follow.

Mr. Trump’s habit of regularly boasting about stock market surges is a practice other presidents avoided. They knew that what goes up may go down again, and they did not want to take the blame for market forces beyond their control.

So, if Trump was willing to take credit for the run-up that ended last Friday morning he can certainly man-up and shoulder the blame for the losses Friday and even steeper declines Monday. Will he do that? Hell, no! My bet is he will blame Obama.

Stay tuned for what might happen Tuesday (today).

Here is more from the Times’ report and more commentary from your Scriber.

The economy is in tricky territory from a markets perspective. While investors have been excited about the prospects of the tax cuts, they are also fretting that the government may be spending too much to pay for them.

“Too much to pay for them”? Try nearly a trillion dollars. See my report from Monday, 84 percent debt increase triggers investor doubts, which it seems was prescient.

Economists often advise governments to run large deficits during recessions to stimulate growth. But the United States economy is already strong.

It grew at an annual pace of 2.6 percent last quarter. Unemployment was 4.1 percent January.

In essence, the $1.5 trillion tax cut is stimulus that the economy doesn’t need. The extra money raises the prospect that the economy could overheat, stoking inflation.

“We’re pouring a tremendous amount of fuel on the fire,” said Rick Rieder, who oversees roughly $1.7 trillion in assets as global chief investment officer for fixed income at asset manager BlackRock.

The Times’ markets overview has the ugly details, one of which was headlined by CNN.com, Dow plunges 1,175 – worst point decline in history.

Why the slump?

John Cassidy (New Yorker) takes a shot at explaining the reasons for the sell-offs on Friday and Monday in Trump Goes Quiet as the Stock Market Slumps.

That was quick! In the course of two days, the “Trump Bump” in the stock market has turned into the “Trump Slump,” with the Dow Jones Industrial Average falling more than seven per cent. At one point, on Monday afternoon, it looked as if we might be witnessing not merely a slump but an outright crash. In less than ten minutes, the Dow fell nearly a thousand points before quickly rebounding. It closed the day down “just” 1,175 points, or about 4.6 per cent, at 24,345.80.

Obviously, this was a big fall: in absolute terms, it was the largest points drop ever. But it needs to be placed in the perspective of stock-market history—on Black Monday, October 19, 1987, the Dow fell twenty-two per cent—and also of the record-breaking run-up that preceded the past few days of declines. Between December 29th and January 29th, small investors piled into the market, and the Dow tacked on close to nineteen hundred points, racing past twenty-five thousand, and then twenty-six thousand. On January 29th, the index closed at 26,616.70. The slump during the past week has wiped out the January run-up, and the market is now down a bit on the year. But people who looked at their 401(k) accounts on Monday night won’t have noticed much of a difference from the end of 2017.

For investors, that’s the good news. More worrying is the fact that there is no way to know whether the correction will end here. The market has been looking frothy for a good while now, and a substantial fall was inevitable at some point. Just as upward movements in stock prices can be self-reinforcing, drawing more people into the market, so can falls in prices. Much will depend on how ordinary investors react to the dramatic movements on Friday and Monday. If they decide to cash out some of the gains they’ve made in the past nine years, there will be further falls.

Mrs. Scriber reminds us all: you only lose money if you sell. Cassidy continues:

In actual fact, the link between Presidential policies and the stock market is indirect, and often tenuous. On this occasion, the trigger for the market sell-off wasn’t anything Trump did: it was last Friday’s employment report from the Labor Department, which said that strong job growth is continuing and wages are finally picking up a bit. (In December, hourly wages rose at an annualized rate of 2.9 per cent.) For the majority of Americans who don’t own any stocks, that was excellent (and long overdue) news. But it raised fears that the Federal Reserve might raise interest rates more rapidly, which could, in turn, choke off the economy. And that’s what spooked investors.

Quite possibly, there was an overreaction. With inflation still running well below the Fed’s target rate of two per cent, it seems highly unlikely that the new Fed chair, Jerome Powell, will deviate anytime soon from the gradualist course established by his predecessor, Janet Yellen. (Monday was Powell’s first day in his new post.) But, with stocks trading at such high levels, they were always going to be vulnerable to some unexpected news, particularly on the inflation front.

As long as the stock market sell-off doesn’t turn into an outright panic, or threaten the health of a big financial institution, the Fed will probably welcome it as a necessary correction. Over the weekend, in the final interview of her tenure, with CBS News, Yellen noted that the price-to-earnings ratio, a commonly used valuation measure for stocks, is at the very high end of its historic range. “Now, is that a bubble or is it too high?” she went on. “And there it’s very hard to tell. But it is a source of some concern that asset valuations are so high.”

To the extent that a sell-off reduces the threat of a full-on bubble, it will make Powell’s job easier, and also make it less likely that this economic cycle will end in the same way the previous two did—with a crash. It could end up giving the Fed more leeway to hold off on further interest-rate increases, which would be good news for America’s workers, many of whom are finally getting a raise.

But don’t expect Trump to look at things in this way. He lives in the moment and, even during his darkest days in the Oval Office, the stock market has given him something to crow about. For some reason, he didn’t mention it on Monday.

Chill out, take the long view: US Economy Still Strong

Context Matters. The Stock Market Drop Is Less Scary Than It Seems.. It can be easy to be misled by big point swings after a long period of quiet in global markets. The NY Times advises:

There is an important idea to keep in mind at a time like this: Take the long view.

This market decline so far has returned the market roughly to its level in mid-December, less than two months ago. The 7.8 percent drop in the Standard & Poor’s 500 over the last six trading days is similar in scale and speed to drops in January 2016 and August 2015, neither of which left lasting scars, and is short of the 10 percent drop that would qualify as a market correction.

The sell-off may be “just” a market correction so a panic reaction is not warranted. The Associated Press (via the Daily Star) reports that US economy still fundamentally strong despite falling stocks.

A wave of fear about inflation and higher interest rates has sent stock prices tumbling and raised concerns about corporate profits. Yet the rush of anxiety has obscured a fundamental fact about the U.S. economy: It’s healthy.

Economists are generally bullish in their outlooks for 2018. Jobs and wages are picking up and many Americans appear confident enough to buy homes. Sales of existing houses reached their highest level in 11 years in 2017.

That very economic vigor, in fact, is a key reason why investors anticipate higher inflation and interest rates. Higher borrowing rates over time could undercut corporate earnings as well as stock prices. And some fear that the Federal Reserve might miscalculate and raise rates too high or too fast.

But no one is sure that will happen. And for now, the economy remains on firm footing, even with the prospect of somewhat higher inflation. The inflation concerns escalated after Friday’s monthly U.S. jobs report showed that average wages surged 2.9 percent in January from 12 months earlier — the sharpest year-over-year gain since the recession.

“What we’re seeing right now is an economy overall that is doing quite well and has strong fundamentals,” said Gregory Daco, chief U.S. economist at Oxford Economics. “The economy remains on track to expand at a fairly solid pace, and along with that comes inflation.”

The AP report goes on to list “some key reasons why the economy remains robust despite the jitters on Wall Street”. Quoting: jobs and wages are going up, consumers and businesses are spending more, household finances in decent shape, and the global economy [experiences solid growth].

Sarah Suckabee Handers to make daily announcements about stock market increases

If you’ve stuck with me this far, despite the depression and despair, you deserve a break. Here from the New Yorker satirist Andy Borowitz is another, lighter take on the Trump Slump: Trump Considering Firing Dow Jones Industrial Average.

WASHINGTON (The Borowitz Report)—After watching it suffer its worst losses since he became President, Donald Trump is “seriously considering” firing the Dow Jones Industrial Average, aides have confirmed.

According to the aides, Trump is “furious” at the D.J.I.A. for going down so precipitously and believes that it has treated him “very unfairly.”

“Increasingly, the President has become convinced that the Dow Jones Industrial Average is not on his team,” one aide said. “Seeing the negative Dow numbers in the corner of the TV screen has been wrecking eleven hours of every day for him.”

Reportedly, Trump is mulling replacing the Dow with a new system, in which Sarah Huckabee Sanders would appear every day at 4 p.m. to announce how high stocks had skyrocketed.

En route to an appearance in Ohio, Trump stopped short of saying that he would ask for the stock market index’s resignation, but his contempt for the Dow was palpable.

“The Dow Jones Industrial Average is a disgrace, and it should be very, very ashamed of itself,” he said.

A classic case of psychological projection, Scriber thinks.

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