To start, there was a relief rally Wednesday. It was a Whopper of a Relief Rally with the S&P500 (SPX) surging 9.52%. It was tied for the 8th largest percentage rally for the SPX of all time. Should you be drawing any parallels to 2020 (for which a case can be made) then we could have a similar rally in the cards, just as the two rallies on March 13, 2020 (+9.29%) and March 24, 2020 (+9.38%), but don’t hold your breath.
So What Happened Since I last Wrote?
From the 10,000 foot level, we know what happened last week and I talked about that in Part 1. However, underlying the surface many other things took place or might have taken place.
Like most people I get news and information from the financial media. Also, there are rumors running rampant which cannot be verified. This is a problem with what we call “fast markets.”
More importantly, I call around to my trusted contacts in the industry. Here are some things to consider:
On Monday the stock market experienced some violent market swings. It was a roller coaster ride that I have never experienced or for which there is historical reference. The market opened lower then shot up higher only to fall once again. All said, the S&P 500 (SPX) declined 0.23% and the NASDAQ (NDX) rose 0.1%. If you took the day off, it appeared that it was a quiet day. However, from high to low, the SPX had an 8.5% swing. So, what happened? Apparently, there was a rumor posted on social networking that Trump would pause tariffs for a few months. This caused the surge. The White house denied the rumors which had stocks fall back to earth. Understand that there are all sorts of computerized and algorithmic trading that takes place based on information that is extracted from news organizations and social networking. This is only exacerbated by Artificial Intelligence’s (AI) role in the financial markets.
The 10-year US Treasury as well as the 30-year US Treasury were met with heavy selling. The 10-year is more important to financial markets as the yield bounced from 4.01% earlier this month to 4.34% yesterday. That’s a fact. Why that occurred is subject to speculation. There were rumors on the street that either China or Japan, or both were big sellers of US Treasuries. China in retaliation for President Trump’s escalating tariffs to the Peoples Republic of China (PRC). Japan apparently was looking to lighten up on exposure to the US Economy.
Volatility (as defined by the VIX or “fear” index) has been on the rise. It then came back down after Wednesday’s market rally and re-spiked Thursday as the market reversed some of Wednesday’s gains. Expect volatility to continue until the market has normalized.
On Wednesday, President Trump ultimately paused the higher and reciprocal tariffs for all trading partners, except China for which he increased tariffs even more, and continues to do so. The reason for this pause was apparently for two reasons. First, many nations reached out to the United States saying that they want to come to the negotiating table with the US. Second, prominent Wall Street individuals who have the President’s ear suggested that he hit the pause button. China is another story. It was rumored (remember there is all sort of rumors going around as I alluded to earlier) that China reached out to European and other nations (likely ASEAN nations) hoping that they would take China’s side. Apparently, as the rumors go, those other nations gave China the middle finger and sided with the US. The net result was the Whopper Rally I mentioned above.
On Wednesday, I bought some Verizon (VZ) for our dividend accounts, knowing full well that on Thursday the stock went ex-dividend.
Thursday, the market seemed to be doing some backing and filling from Wednesday’s rally. If you sold on Tuesday, you are second guessing yourself. If you bought on Wednesday that’s OK because putting a little capital to work was the correct move. Bottoming is a process; just let it play out.
Where is the Fed?
The Fed once again has its head buried in the sand. Their nonfeasance is now morphing into malfeasance. Before the markets opened on Wednesday, the Fed should have cut rates immediately by 50 to 100 basis points. However, Chairman Powell is nowhere to be found. Inflation appears to be moderating or declining. This morning it was announced that inflation eased to a six-month low. However, there are fears that tariffs will drive inflation higher. Guess what, that is all speculation and/or theoretical as there is no empirical proof. Powell do your job and take some decisive action! And what if that does not happen? Powell will have egg on his face, but more about eggs just below.
We know that crude oil is declining as are other commodities. It might take a while for lower crude oil prices to flow through to the pump. Egg prices per an industry group EggPrices.org who uses the Bureau of Labor Statistics as it’s source shows in a chart that egg prices peaked in late February / Early March and have since normalized. USDA (US Department of Agriculture) data suggests that beef and other animal protein prices remain at high levels, but don’t seem to be elevating substantially as they did a year or two ago.
Economists who get plenty of media exposure are just useless. I learned a long ago, from my professor at Wharton, a future Nobel Prize winner, that economists are good at explaining the past but are horrible at forecasting the future. Remember that economists have predicted nine of the last five recessions.
What’s Next?
The House of Representatives passed a tax and budget bill. Now the Senate must act for it to pass under reconciliation.
Slowly but surely, we will see one by one tariff deals announced country by country. Overnight, supposedly Vietnam offered a crackdown on Chinese goods being shipped from its country to the United States in return for tariff relief.
Janet Yellen, previous Secretary of the Treasury, financed trillions of dollars of new debt at relatively short maturities. That debt is soon maturing and must be rolled over. It will now have to be done at higher rates.
Now that China increasingly realizes that it is alone, it might come to the bargaining table. China has its own economic malaise which is getting worse. They have built their entire economy on a mercantilist structure. That is now in decline. If China does not fix its own problems and come to the table with Trump, you might see some of the inner workings of the PRC take action against Chairman Xi Jinping. Of course that is speculation, but stranger things have occurred in communist nations. Trump will exact a heavy price from China even if they agree to come to the bargaining table.
An interesting anecdote to pass along. Late Wednesday night an old copper pipe sprung a leak, flooding one of our guest rooms. We had the leak fixed within a few hours. However, before we were to begin remediation, it was required that the drywall be tested for asbestos. Apparently older drywall may have contained asbestos. In addition, more recently constructed drywall made in China, which helps reduce construction costs may have asbestos as well. Perhaps, we are just fed up paying less for poorer quality goods and will be happier paying a bit more for higher quality products. Remember the old adage: “You get what you pay for.”
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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC was long VZ, - although positions can change at any time. The mention of stocks are not recommendations and may not be suitable investments for your individual situation.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, (LVAM) an investment advisor representative, specializing in high-net-worth private wealth management. LVAM is a separate entity of Osaic Advisory Services, LLC, a registered investment advisor.
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