How Do You Solve a Problem Like the Market?

 

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?

If this were a normal time—as it was until, say, January 26th–fundamentals would drive everything. As we pointed out last week here and this week in my MarketWatch column, the economy is solid and job growth is good, but wages and inflation aren’t rising much. That should allow the Federal Reserve to continue gradually raising interest rates—give or take an extra rate hike this year—and then gradually shrink its bloated balance sheet.

Last year investors looked only at the bright side of the Trump presidency–the wholesale rollback of regulations, particularly against energy companies, and the prospect and then reality of big tax cuts for corporations. These were tangible things that fit easily into Wall Street’s macroeconomic models and earnings projections.

But how can you measure the impact of a potential trade war with China? Can anyone state with any confidence how far it would go?

Same thing with North Korea: What odds can you give that talks between President Trump and North Korean President Kim Jong Un will result in a deal—or, conversely, that talks will collapse in mutual recriminations and even greater tensions?

As for Syria, with multiple actors—the U.S., Iran, Russia, and Israel—scrambling to protect their interests, who can say that this will stay within “normal” bounds, especially with a president increasingly pressured by Special Counsel Robert Mueller and other investigations?

This is why stocks have been careening up and down: You literally can’t quantify this kind of risk. The market’s volatility will be with us for some time.

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