On Monday the Standard & Poor’s 500 index was poised to hit a new all-time high.
Just 15 points shy of its record peak of 2872.87, set on January 26th, the S&P was coming off a week of solid advances and a second-quarter earnings season that knocked the cover off the ball: With over 80% of S&P 500 companies having reported, earnings rose by a torrid 24% year over year.
That followed a solid July jobs report and strong second-quarter GDP growth of 4.1%. And with all the good news and recent stock gains, the S&P still changes hands at 16.5x 12-month earnings projections—pretty much in line with its five-year average, according to FactSet Research.
With fundamentals and valuations this good, what could possibly go wrong?
Well, plenty, it turned out, starting with the trade wars launched by President Donald J. Trump against China. That concern has been around since the election. But the president has ratcheted up his threats of late, and that has roiled emerging markets, of which China represents 40% of some indexes.
Turkey was the latest domino to fall. Early in his administration, President Trump seemed to be fast friends with Turkish strongman Recep Erdogan. The Turkish president is a real autocrat, and Trump is thus far only a wannabe.
But Erdogan had imprisoned an American Evangelical pastor, Andrew Bruston, for two years for allegedly helping rebels plot a coup d’état . That suspicious coup became a pretext for the Turkish autocrat to purge or imprison journalists, political opponents, and others.
In late July the Turkish government moved Bruston to house arrest, but Trump demanded his freedom. When Erdogan refused, Trump imposed tariffs on Turkish exports of aluminum and steel. On Friday he doubled those tariffs, sending the Turkish lira plunging by almost 25 percent, its worst one-day loss since 2001.
Other weak emerging market currencies were pummeled, too—the Argentinean peso, South African rand and Russian ruble all took it on the chin. Every single EM currency fell Friday, Bloomberg reported. Even the non-emerging market British pound sold off amid fears of Brexit chaos, as investors fled to safe assets like U.S. Treasuries. The U.S. dollar index hit a 14-month high.
Fear this currency contagion would spread to stocks became a self-fulfilling prophecy. Emerging markets stocks sold off, too, but so did the S&P, Dow Jones Industrial Average and Nasdaq Composite index.
Will this become a full-fledged market crisis like the Asian contagion of 1998? Who knows? But the fact that the S&P came very close but again failed to top its previous all-time high is not a good technical sign.