State of the Stock Market Analysis for the Week Ending on March 25, 2018 Potential Trade War has Investors Nervous 3-25-18)

All You Need Is Jobs

The last thing investors wanted to see this week was an escalation in what we are now calling a potential “trade” or “tariff” war with China. It is still fairly contained, but it is in the spotlight as we head toward the end of the first quarter. Friday’s decline for the major indices added to the Thursday fall of 700 points for the Dow, and it had investors feeling nervous, to say the least. This is not the time of year for investors to feel like it is September or October, but having the Dow posting a weekly loss of 5.7% and the S&P 500 dropping by 6% has many bulls on edge. We were hoping for a Friday bounce, but that was not what happened. It was a tough week.

We had a Federal Reserve meeting led by Jerome Powell that hinted strongly at three or even four more rate hikes this year, and that might also have played into the pullback in stocks that we witnessed this week. Rates are still low, and the idea that the Fed has already made six rate hikes is mind-boggling. Short rates are 1.75%, and that is AFTER six rate hikes. The financial meltdown of 2008-2009 triggered some dramatic responses. The TARP bailout in October of 2008 cost more than $700 billion. When Hank Paulson was asked about the bailout amount, he replied that he was not sure of the amount, but that it “had to be big.” It seemed to have worked well, but we are maybe paying for it now.

The political scene in DC may have perhaps helped to hurt the stock market this week, along with the worry of rising interest rates and a trade war with China. These developments are big, and these issues might explain why investors are feeling nervous right now. President Trump’s tax cuts and moves toward infrastructure spending and deregulation worked extremely well for the stock market. It renewed confidence, and the stock market rallied more than we have seen in many years. The political picture is more complicated now, though and the constant turnover of White House staff is distracting for the economy and investors. This explains the challenging atmosphere we saw on Wall Street this week.

This current pullback for the stock market is a tough one. We are re-testing the early February lows, and bulls are hoping for a bounce. Having the major indices selloff and close at their lows on Friday was not encouraging. A bounce on Monday would be great, but again, trade wars, rising interest rates and a White House in disarray might make a bounce a bit difficult. The fact that we are still in a nine-year bull market is also something to keep in mind. The changing of the guard at the Federal Reserve from Bernanke to Yellen to Powell over these years is also a factor to keep in mind. Jerome Powell performed well at his press conference on Wednesday, but he is still the “new kid on the block.”

We have grown so accustomed to the Fed bailing out the stock market, that it is like being on Mars to think that the Fed is “raising” interest rates. The artificially low rates were put in place nine years ago to avoid a “Great Depression.” We got, instead, a “Great Recession,” but that scenario is running its course. What Jerome Powell inherited is challenging to say the least, and we wish him the best of luck. The post-Lehman meltdown that took the S&P 500 down to 666 in March of 2009 somehow bounced. Bulls are hoping that a bounce is on the way, so we will see what happens next week. Economic numbers are still strong, which is a big plus.

The Facebook (FB) privacy issues are still waiting in the wings, and seeing FB’s 3% decline on Friday is adding fuel to the bearish fire. It is always worrisome when a “big dog” like Facebook stumbles. It affects market sentiment, and like the great Warren Buffett used to say, you only know who is not wearing bathing suits until the tide goes out. Anyway, college hoops are in full force, and the upsets are amazing so far. The Gorilla wishes each and all a wonderful weekend, and we will be back in action on Monday. Spring has sprung, and better days are on the way. Have a great weekend!

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