Opinions varied regarding what the U.S. stock markets would do depending on the results of the midterm elections, given that polling indicated the Republicans would hold the Senate but lose the House. Would stocks decline, fearing the Trump economic plan would be in jeopardy with a revitalized Democratic “wave”? Or would gridlocked government bring stability that would reassure investors that the boat would not be rocked?
Initially, the market bounced, with gains on the Wednesday and Thursday. Then on Friday, it turned ugly again. What happened? There are a lot of moving parts to the picture, so let’s try to make sense of them.
Looking beyond the election
Political developments tend to only cause temporary swings in markets and only become more lasting movements if the political event in question portends an intermediate impact on earnings and profits for the business sector. So the election outcome may bounce the market around temporarily, but economically there are more seismic events brewing.
Writing in Forbes, TD Ameritrade Chief Market Strategist JJ Kinahan describes a market that is fretting over the threat of global recession and rising inflation.
First, producer prices rose last week and investors fear that this will reinforce the Federal Reserve’s determination to continue raising interest rates. Another hike is scheduled for next month just before the holidays.
Rising interest rates cut into business profits and suppress consumer spending on goods for which they borrow money such as homes, cars, appliances and the like. Related to producer prices, next week will come the release of consumer prices and if it shows an increase also, it may reinforce investors’ inflation fears.
Second, the slowing global economy, particularly in China, gives investors the “shivers” according to Kinahan. Investors are concerned about slowing auto sales in China among other worries. As China’s economy slows, several emerging market nations that sell raw materials to China feel the pinch, putting them in peril of defaulting on commercial and sovereign debt used to fund their growth. A surge in the strength of the U.S. dollar puts these economies in a bind paying their dollar denominated debts.
Finally, oil prices fell for ten straight trading sessions, also rattling markets. Jerry feels this is a temporary anomaly. Bank Credit Analyst, the outstanding firm on which Jerry relies for much of his data analysis, is standing by its prediction of spiking oil prices in 2019.
Putting it all together
The Trump economy in the U.S. is as robust, if not more so, during the Reagan Revolution of the 1980s. But global forces are stirring that can put it all in jeopardy. Today, Monday 11/12/18, the equity markets took a pounding with the DOW off 602 points and the NASDAQ down almost 3 percent with tech stocks taking a pounding. Apple is reporting disappointing demand going into the crucial holiday season and the stronger dollar is causing developing nation debtors vexing problems paying their dollar denominated debt bonds.
Listeners of Jerry Tuma’s Smart Money Radio know that Jerry believes we are likely, in the topping phase of this aging bull market, if not beginning to roll over to a bear. Jerry forecasts a higher likelihood of a bear beginning sometime from now through the next six months, with a recession following six to nine months thereafter.
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