In my previous post, I wrote that the U.S. stock market had been going up since December because, given the backdrop of economic growth and interest rates, the fear in late-2018 was dramatically worse than the immediate reality. But now is the question is whether Trump’s latest escalation of the trade war alters the economic outlook enough to completely derail the market rally and put the bear market scenario back on.
In my view, the market situation is not that dire yet. If, in fact, we are still in a bull market, a drop of up to 10% from the highs could have been expected in the near future. In most cases, drops of that magnitude are associated with events in the news. Some examples are below:
Jun-Jul 2009: Early discussion from Obama administration about healthcare reform. World Bank downgrades outlook for global economic recovery.
Jan-Feb 2010: Obama administration proposed legislation for financial reform.
Mar-May 2012: European Debt Crisis. Sharp slowdown in U.S. economic growth.
Oct-Nov 2012: Associated events were unclear. Obama reelected.
Sep-Oct 2014: Ebola epidemic. European economic growth slows.
The events in the news do not typically seem to drive the entire market correction. In some cases, the news appeared to kick off the drop, and then after a short rally the selling proceeded on its own (2009, 2010). In other cases, the drop started out like an ordinary pullback in response to overbought conditions, but then the news seemed to exasperate the decline (2012, 2014).
In the present situation, as of Monday’s close, the NASDAQ-100 was down 7% from the highs, with the Dow Industrials down 5.5% and the S&P 500 down 5.2%. For now, I am going to consider the increased tariffs a catalyst for a correction that was going to happen eventually. I will rethink this if the declines extend more than 5% from here.
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