August 23, 2019 – This week’s Week in Review could have been about a lot of things.
It could have been about blow-out earnings reports from a couple of big-name retailers.
It could have been about the spread between two-year and ten-year Treasuries continuing to flirt with inversion.
It could have been about Jay Powell finally finding the right tone to calm markets and not send them zooming higher or lower.
All of that happened, but looking back at the week, the biggest moves, and ultimately the reason the market closed lower for the last five days instead of higher, is President Trump and the trade war.
Stocks were pointed higher in the pre-market this morning until China announced some new tariffs, which were in retaliation for the tariffs Trump announced last month. Both sets of duties are scheduled to go into effect on Sept. 1. China’s new levies hit soybeans, automobiles and oil, all sectors where Trump receives quite a bit of support, but it is hard to know what political calculations China is making as their imports from the U.S. are not as broad as our imports from China.
Next came Federal Reserve Chairman Jerome Powell, who said, in part, “We will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2% objective.”
Powell also said that uncertainty around trade policy is contributing to weakening in the global economy, including weak manufacturing and business capital investment in the U.S.
Those remarks were enough to get the market back into green numbers, but then, the president’s Twitter account flickered to life and things started to head south. First, he sent a pair of tweets attacking the Federal Reserve and Powell, whom he appointed:
As usual, the Fed did NOTHING! It is incredible that they can “speak” without knowing or asking what I am doing, which will be announced shortly. We have a very strong dollar and a very weak Fed. I will work “brilliantly” with both, and the U.S. will do great…
….My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?
From those tweets, it seems the president expected Powell to announce a rate cut from the dais at The Federal Reserve Bank of Kansas City’s Economic Policy Symposium, an annual gathering of central bankers from around the world.
The irony of this situation is that Powell’s speech had helped push the market back into green numbers as it seems to have hit the right balance between hawkish and dovish. Similarly, the minutes of the Fed’s July meeting, while not promising more rate cuts, left open the possibility of more. Powell’s tenure at the Fed had been characterized by, among other things, big swings after ever communication, but it seems like he may have found the right balance this week.
Those tweets were followed a little later by a quartet of tweets more specifically about trade:
Our Country has lost, stupidly, Trillions of Dollars with China over many years. They have stolen our Intellectual Property at a rate of Hundreds of Billions of Dollars a year, & they want to continue. I won’t let that happen! We don’t need China and, frankly, would be far….
….better off without them. The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must STOP. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing..
….your companies HOME and making your products in the USA. I will be responding to China’s Tariffs this afternoon. This is a GREAT opportunity for the United States. Also, I am ordering all carriers, including Fed Ex, Amazon, UPS and the Post Office, to SEARCH FOR & REFUSE,….
….all deliveries of Fentanyl from China (or anywhere else!). Fentanyl kills 100,000 Americans a year. President Xi said this would stop – it didn’t. Our Economy, because of our gains in the last 2 1/2 years, is MUCH larger than that of China. We will keep it that way!
There’s a lot going on there, but the big items are the president ordering companies to being moving their operations out of China, ordering shipping companies to search packages for Fentanyl and a promise to respond to China’s tariffs this afternoon.
It is (at best) unclear what authority the president may have to determine where companies are allowed to operate, but additional tariffs or other measures could make operations in China less attractive.
Those follow-up measures have yet to be announced as of this writing, but the market action the rest of the day points to investors being unwilling to stay in stocks over the weekend knowing further escalation of the trade war is coming.
Finally, Customs and Border Patrol, a division of the Homeland Security Department that is responsible for keeping drugs from entering the U.S. It would likely be illegal for either the USPS or private carriers to do much in the way of inspection outside of screening out obvious violations.
This escalation comes at the end of a week were retailers such as Target (TGT) and Dicks Sporting Goods (DKS) reported better-than-expected results and helped to buoy markets. Home Depot (HD) and Lowe’s (LOW) were also both gainers on the week, despite noisier quarterly reports owing in part at least to falling commodity prices.
In response to Trump’s tweets, David French, a senior vice president at the National Retail Federation told CNBC, ” It is unrealistic for American Retailers to move out of the world’s second-largest economy, as 95 percent of the world’s consumers live outside our borders. Our presence in China allows us to reach Chinese customers and develop overseas markets.”
We have yet to see a mass shuttering of plants in China from the trade war, and a series of tweets seems unlikely to prompt such a move, but, as we have mentioned in this space and others, it is very difficult to run a business focused on the long term when you don’t know what the rules will be. “Policy uncertainty” as this is called is real, but like many things in economics, it can be hard to measure the effects of, particularly in real time.
We do know that stocks fell and bonds rose, with the spread between two and ten-year Treasuries again turning negative for a while.
Trump, for his part, tried to lighten the mood with a joke:
The Dow is down 573 points perhaps on the news that Representative Seth Moulton, whoever that may be, has dropped out of the 2020 Presidential Race!
The Dow would ultimately lose 623 on the day.
On the week, the S&P 500 lost -1.44%, the NASDAQ lost -1.83%, and the Dow Jones Industrial Average lost -0.99%.