You might compare investing today to juggling: You need to keep several balls or pins in the air and make sure they don’t hit the ground.
That’s the tradeoff between risk and reward, hope and danger, that confronts us now.
As I’ve stressed in these commentaries and my MarketWatch column, the fundamentals for stocks look very good now: a strong economy, subdued inflation, very low interest rates by historical standards, and great earnings, all without outlandish valuations.
But there’s a lot of uncertainty as well, particularly about trade and geopolitical issues involving North Korea (subdued now because of the planned upcoming summit between President Donald Trump and North Korean President Kim Jong-Un); the Middle East, particularly Syria, and longer-term concerns about growing household and government debt burdens.
That has translated into rising share prices because of fundamentals but increased volatility because of all the uncertainty.
Which one will prevail?
It’s pretty hard to figure out what makes the market tick these days.
Is it the economy? On days investors get good news on that front, stocks take off. Last week’s jobs report, for instance, pointed the way to good growth and low inflation—not too hot and not too cold.
Or is it politics? When tweetstorms erupt from the official residence of the White House, people listen and markets move.
When President Trump launched a Twitter attack on Amazon a couple of weeks ago, the stock tanked. When he announced he would slap big tariffs on China, markets sold off. And this week, when he threatened to unleash missiles on Syria in retaliation for President Bashir al-Assad’s latest chemical attack on his own people, oil prices rallied and stocks tumbled.
But then, China’s President Xi Jinping made what were construed as conciliatory remarks on trade (but was really a rehash of previously stated positions) and both Russia and the U.S. backed off talk of military action in Syria. In both cases, stocks rallied.
So, how can you tell what’s really moving markets?
It was a week to remember in Washington and a week to forget on Wall Street.
In the nation’s capital, President Trump continued to drain the swamp of his own appointees.
The departed included Secretary of State Rex Tillerson, attorney John Dowd, and National Security Adviser General H.R. McMaster.
Their replacements—respectively, CIA Director Mike Pompeo, Fox News talking head Joseph DiGenova, and uberhawk John Bolton—are uniformly more hard line and supportive of the president than were their predecessors.
Meanwhile, Trump, newly liberated to the point, Vanity Fair reported, of “f__ing doing it my way,” slapped tariffs on Chinese imports worth up to $60 billion a year. China responded with some targeted tariffs of its own.
Meanwhile, on the Left Coast, Facebook’s CEO Mark Zuckerberg remained silent for days after it was revealed that Cambridge Analytica, the data firm that helped the Trump campaign in 2016, had taken personal information on some 50 million Facebook users without their consent.
Talk of trade wars and political instability drove the Dow Jones Industrial Average down 1,000 points and the S&P 500 4% through noon Friday. Facebook’s crisis shaved 12% from its share price and helped push the Nasdaq Composite index down 5% this week.
How real is the risk?
In college—or high school, if you were really smart–you probably read (and forgot) Samuel Beckett’s great existentialist play, Waiting for Godot.
In that play two vagabonds—or characters we think are vagabonds—named Vladimir and Estragon stand on a bare stage with a tree in the middle and talk in circles. But they always come back to the same thing or person—Godot. “Let’s go.” “We can’t.” “Why not?” “We’re waiting for Godot” “Ah.” If Seinfeld was a TV show about nothing, Godot was a play that went nowhere.
That’s where the stock market—you knew I was going to talk about that sooner or later, didn’t you?—has been the last few weeks: stuck in the middle of a classic tug of war between bulls and bears.
Since hitting all-time highs on January 26th, the Dow Jones Industrial Average and the S&P 500 index sold off in a full correction, falling 10% before bottoming on February 8th. So, for the past month or so, the averages have been meandering up and down, retesting neither the previous high nor low.
What’s causing this and, unlike Godot, does it mean anything?
After a rough few days, investors got some genuinely good news late this week.
On Thursday, President Trump signed an order imposing 25% tariffs on steel imports and 10% on aluminum imports, but he exempted Mexico and Canada (the biggest exporter) for now. On Friday, Treasury Secretary Steven Mnuchin said other exemptions may follow.
Then, in a stunning development Thursday night, South Korea’s national security advisor Chung Eoi-yong announced at the White House that North Korean leader Kim Jong-eun would suspend nuclear and missile tests and that President Trump would meet with him this spring.
Finally on Friday morning, the Labor Department announced that nonfarm payrolls grew by 313,000, way above expectations and January’s 200,000 gains. Unemployment stayed at 4.1% and average hourly earnings rose by 0.1%, or 2.6% on a yearly basis.
By mid-afternoon Friday, the Dow Jones Industrial Average had gained almost 400 points, the Nasdaq Composite index was up more than 100, and the Standard & Poor’s 500 index had advanced by nearly 40. The S&P is less than 100 points shy of its all-time high reached on January 26th.
So, which mattered most? And what does it say about stocks’ future direction?
It’s warm and sunny in Florida and Arizona, where baseball’s spring training is underway.
It’s the time of year when players are chipper, managers are geniuses, and fans of every team from the world champion Houston Astros and the new Murderers’ Row New York Yankees to the cellar-dwelling Detroit Tigers and Philadelphia Phillies think they have a good shot at winning it all.
Meanwhile, a Nor’easter has pelted the middle Atlantic states with wind, rain, even snow, and a different kind of storm engulfed Wall Street. Since Tuesday, the Dow Jones Industrial Average has lost more than 1,000 points and the S&P 500 is down nearly 100 (although both rallied off their lows).
Gurus and pundits blamed it on two things. First, new Federal Reserve Chair Jay Powell’s Congressional testimony, in which he noted how good the economy was, led some traders to conclude there would be four, not the expected three, rate hikes this year.
And then on Thursday, President Donald Trump announced he would impose 25% tariffs on steel and 10% tariffs on aluminum imports to protect American jobs. The move surprised many as the corporate free traders in the administration lost to the economic nationalism that had defined his presidential campaign.
So, which one mattered more? And what’s next?
Shh, don’t tell anyone, but I think the recent stock market correction is done.
Since the February 8th bottom, the S&P 500 has gained 5.6%, and is now close to 100 points from its January 26th all-time high. The Dow Jones Industrial Average is once again above 25,000, some 1,200 points above its recent lows.
The Nasdaq Composite index has again topped 7,000 and posted a bigger percentage gain than either the Dow or the S&P from its low. Investors have jumped on board the FAANG stocks again, betting on fast growing companies to weather whatever economic storms are brewing.
And the much-watched CBOE Volatility index (VIX) also reflects growing confidence and calm. The VIX spiked to 37, a multiyear high way above recent lows below 10. Now it sits in the high teens. If stocks keep rising, the VIX will likely continue to slide.
So, why do I think the worst is over?
Remember last week, when the sky was falling? Well, it didn’t.
Last week saw two days in which the Dow Jones Industrial Average lost 1,000 points, the only time that’s happened in stock market history. (Because the Dow was so high beforehand, they weren’t the biggest percentage losses ever.) At the intraday market lows, the Dow and S&P 500 index both lost 12% from their January 26th peaks.
Investor sentiment was terrible. From a reading of 78, “extreme greed,” in late January, CNN Money’s Fear & Greed index plummeted to 8, extreme fear. (It was at 11, still extreme fear, on Thursday.) The CBOE Volatility index, the VIX, soared into the high 30s after languishing below 10 for months.
And yet this always looked, smelled, and felt like a correction to me, although even I am surprised by how quickly it’s rebounded.
We’ve seen five consecutive days of stock gains. The Dow has recovered more than 1300 points, nearly half of what it lost during the correction. The S&P now sits 5% below its all-time high.
So, which was more real, the sell-off or the recovery?