The Permanent Market Sell-off

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The Permanent Market Sell-off

By: Todd M. Schoenberger

Simply put: The stock market is in disarray and your retirement plan, college savings plan, and any other investment portfolio you manage is getting pummeled and hemorrhaging cash.  This is a disaster; and doesn’t appear to be reversing course any time soon.

The catalyst for the recent sell-off is clearly the ongoing and escalating trade matter between the United States and China.  The two largest economies in the world are continuing to go toe-to-toe, and neither side is willing to give an inch, as imposing tariffs and currency devaluation seem to be the only course of action by either side.

For those who believe the trade war is temporary should be considered naïve and absentminded.  The impact will be felt for several quarters as companies are certain to publish earnings reports that will further accelerate the selling on Wall Street.

As the Director of the National Economic Council, Larry Kudlow, often repeated every night when he was a television host: “Profits are the mother’s milk of stocks.”

Mr. Kudlow’s statement is accurate and is the reason why the remainder of 2019 and 2020 will likely be a historic selling period for Wall Street and the rest of America.

The Dow is now a stunning five percent lower from its all-time high reached just a few weeks ago.  The sell-off is a direct result of the 10 percent tariff on $300 billion worth of goods imported from China, scheduled to begin September 1st.  And as Goldman Sachs reported over the weekend, roughly 60 percent of the items subjected to those tariffs will be consumer goods.

The Trade Partnership, a Washington, DC trade research and consulting firm, estimates that retailers will pass on the tariffs to consumers in the form of higher prices.  According to Forbes Magazine, The Trade Partnership figures toy prices will rise 17 percent, shoes by 8 percent, clothing by 5 percent, and furniture (including televisions) will increase by 4 percent.

The Washington Post also added the tariffs will cause American shoppers to pay “$4.4 billion more for apparel, $2.5 billion more for shoes, $3.7 billion more for toys and $1.6 billion more for household appliances.”

Price increases, just in time for what the Federal Reserve seems most worried about: An economic slowdown, as explained for the abrupt interest rate cut last week.

Precipitous drops in market valuations typically recover and rarely have macro implications for the overall economy.  However, this time may be different.

It’s no secret there has been a respectable increase in job creation since President Trump took office in January 2017.  According to the most recent Non-farm Payrolls Report, there are 163.4 million people employed in America—a record high.  In addition, the nation’s unemployment rate stands at 3.7 percent—a multi-decade low.  On average, the United States has averaged about 165,000 new jobs per month in 2019.

As these figures appear to be impressive, we are continuing to see layoff headlines creep into the news.  Wall Street bulge bracket firms, such as Deutsche Bank and Citigroup, have announced plans to reduce headcount in the thousands.  And, just today, the world’s largest global bank, HSBC, announced plans to terminate up to 4,000 employees this year.  Considering 90 percent of HSBC’s profits are generated from Asia, one has to wonder if this layoff announcement is a direct result of the ongoing trade war.

Low-income variety jobs are not immune, either.  Nationwide retailers have, so far, announced reductions of 7,500 positions in 2019, and this news was reported prior to the additional ten percent tariff.  Economists are eagerly awaiting to analyze back-to-school shopping sales to forecast additional terminations leading into the final quarter of the year.

Finally, the latest sign of a brewing financial volcano is a widely watched Treasury indicator: the yield curve.

According to Bloomberg News, rates on 10-year Treasury notes sank to 1.74 percent on Monday morning, which is close to completely erasing the surge that followed President Trump’s 2016 election.  In early trading today, 10-year notes fetched as much as 32 basis points less than three-month bills.

This is the most extreme yield-curve inversion since just before the 2008 financial crisis, which is a credible proxy to forecast a potential recession in the United States.

A beaten-down stock market, potential mass layoffs, and global economic turmoil signal dark days ahead.  Investors are best served to reexamine their priorities and reasons for investing because a recovery doesn’t appear to be happening any time soon.

Todd M. Schoenberger is a former Wall Street Hedge Fund Manager and the author of No Lie Lives Forever.  He now resides in Upstate New York.

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