Coming into this week, both the Dow Jones Industrial Average and S&P 500 are now officially trading negative for 2018 and year-over-year. The ongoing trade war is largely to blame as well as the“longest bull market in American history” seemingly coming to a head. The stock market crash is real and is overwhelming investors for good reason. It’s the worst since 2008.
The economy works in cycles, as most people know. Our ten-year bear market following the financial meltdown of 2008 has been propped up by historically low interest rates from the Federal Reserve meant as a means of supporting economic growth. We’re seeing that economic growth and then some. Unemployment is at historic lows, and figures for both productivity and wages are reaching milestone levels of growth.
A large part of the economic cycle, however, is also what’s known as “asset bubbles,” where the price of one asset class becomes inflated as a result of a low interest rate environment and a maturing cycle.
“Markets are fully convinced we are in the last stages of an economic cycle,” said Nicholas Colas, co-founder of DataTrek Research. “Traders are feverishly looking for the dry tinder that will turn a simple short circuit into a full-blown conflagration.”
Looking at charts for both the S&P 500 and the Dow Jones Industrial Average, it’s clear that, even with the February correction, the market has been a bit too bullish.
In addition to a maturing cycle leading to a market correction, Trump’s trade war has riddled the market with uncertainty regarding the near-term future of United States trade policy. That conflict has come to a head in recent weeks first with the G20 summit, hosted in Argentina over November 30-December 1. At the G20, President Trump met with Chinese President XI Jinping. It was announced following their meeting that the U.S. and China would enter into a “temporary truce” regarding tariffs. At the time, it was agreed that both countries would halt new tariffs for 90 days to allow for talks.
“If at the end of this period of time, the parties are unable to reach an agreement, the 10 percent tariffs will be raised to 25 percent,” said the White House.
While an agreement of this nature may typically appease the markets for a temporary time, there wasn’t a break. After a brief recovery on Monday, in Tuesday’s premarket, Trump’s now infamous “Tariff Man” string of tweets sent the Dow crashing around 800 points over the trading day to just over 25,000. It’s truly the President Trump stock market dump.
Adding to the impact of the trade war on bearish investor sentiment, the CFO of Chinese giant Huawei was arrested in Canada to be extradited to the U.S. on allegations of fraud.
“This arrest suggests that as opposed to getting better, things are getting worse,” said Joe Quinlan, chief market strategist at Bank of America’s US Trust. “We seem to be stuck in a cul-de-sac that we just can’t get out of when it comes to the trade standoff with China.”
Between a trade war consistently gaining steam despite a “truce” and rising interest rates in a strong economy, it’s no wonder that the stock market is seeing volatility. The key question moving forward is, when will it end?