Donald Trump’s favorite economic indicator took a dive Wednesday, as the stock market fell 3.1% (for the Dow Jones Industrial Average
, or 3.3% for the broader Standard & Poor’s 500
But the president didn’t make the market rise, and he didn’t make it fall.
Because the economy looks pretty much the same as it did last week. Everything we knew to be worried about, we still do — but things like Trump’s threats to reduce U.S. trade with China and raise tariffs, not to mention the federal deficit he’s exploding to pay for stock buybacks rather than roads, are well-known already.
So is the Federal Reserve’s determination to raise interest rates too quickly, in both Trump’s view — soberly, the president pronounced the central bank “loco” — and my own. The market didn’t just figure these risks out. And they won’t have their biggest impact until 2019 or even 2020.
So maybe the market crashed because of the harmonic convergence, rare as it is, of my agreeing with the president about anything important. It’s Ghostbusters! Dogs and Cats! Living Together!
Snapping back to reality, we still have a market where third-quarter earnings are expected to be 21.2% higher than last year, says CFRA Research strategist Sam Stovall. And heading into this week, valuations were only 5.3% above the average level of the last 18 years, with stocks trading at a price-to-earnings ratio of 17 (using estimates for the next 12 months).
So corporate profits are still rising fast — they’re even expected to rise 9.9% in 2019 from this year’s elevated levels. And with this week’s plunge, valuations are about 1% higher than normal, with interest rates still quite low, if rising faster than many would like.
Then, look at what got hit the worst — that would be technology stocks — and ponder what has, or has not, changed about those.
fell 6.2%, with CEO gazillionaire Jeff Bezos’s net worth dropping $9 billion in a day. Yet its valuation is based on the spread of cloud computing; since going to the cloud usually saves money, it’s illogical that a newfound (and, mythical) wariness of corporate investment quashed it.
And since cloud computing is a service, it won’t be tariffed out of existence. Same with the 5.4% decline in Microsoft
, which has made cloud computing the energy-reviving red sports car of its middle age.
Both fell more than the 3.7% drop in Intel
— which does stand to be hurt by trade, since it sells hard goods that move across borders, and whose revenue growth depends on corporations’ willingness to boost spending.
, getting whacked by metals tariffs that somehow survived Trump’s trade deal with Canada, fell less than 1.5%. General Motors
fell less than that. Meanwhile,
ell 4.6% — even though the administration has bent over backwards to make clear cell phones are the last import from China that will face new taxes. Netflix
fell 8.4%, and they’re not even doing business in China.
In other words, let’s not get carried away believing in the rationality of what just happened. That sets the stage for a little bargain hunting, especially in tech, where CFRA thinks third-quarter profits will be up 24%.
The market’s medium-term problems remain, though.
The Heard on the Street column at the Wall Street Journal says the dip shows how dependent the bull market has been on cheap money — and it is. But money is still cheap, and inflation is still low enough to keep it that way, so long as the Federal Reserve doesn’t delude itself about the poor state of home building and real estate (see the 10% drop since a month ago in the S&P Homebuilder exchange-traded fund
Yet the administration’s trade policies are biting into growth, and will reduce next year’s growth globally by about two-tenths of a percentage point, according to the International Monetary Fund. That’s bigger than it sounds — trimming U.S. growth to 2.5% from 2.7%, as IMF projects, means about 7% of U.S. growth won’t happen. In crude terms, that’s 14,000 jobs a month that don’t get created. Which is more, every month, than the total of U.S. coal-extraction jobs Trump keeps promoting climate change to protect.
Those trade policies are also the biggest threat to blue-chip corporate profits by 2020, since large companies in the stock indices are nearly all global players now. And 2020’s profit outlook will drive 2019 stock returns.
And, sooner or later the budget deficit is bound to matter, though that will take a while to create distortions that lead to a reckoning.
So, don’t worry too much about the market this week. But do keep an eye on it. Between the Fed and the president, a fair number of important mistakes are being made before our eyes.
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