https://www.wsj.com/articles/the-market-gets-what-it-wants-11566755407
Are you talking to me? The market dropped 767 points Aug. 5 on news of China’s currency devaluation, then popped 311 points the next day on delayed tariffs, then sank 800 points eight days later after signs that the yield curve had inverted further. It’s been yo-yoing since then—up 275, down 623 on Friday. When the stock market goes through these spasmatic gyrations, it’s a desperate cry for attention. But what is it trying to say? Ya got trouble, with a capital T.
We had a great economy going. Tax cuts had led to 50-year-low unemployment, rising corporate profits, and a growth rate nearing 4%—almost twice the anemic level it hovered at during the Obama years. But like an “own goal” in soccer, the Navarro-Lighthizer-Mnuchin tariffs scored one for chaos, and now the stock market is reacting. Until recently the market was pretty silent on trade. Could the recent drop be its loud call to end tariffs?
President Trump delayed some of his Sept. 1 tariffs until Dec. 15, including those on iPhones and laptops, and the market traded up. But the tariff burden is still onerous, and stocks dropped again in sync with the bond market as 30-year Treasurys dropped below 2%, their lowest rate since . . . ever. This flight to safety may indicate structural problems in credit markets, triggered by tariffs. But it’s almost as if the bond market is demanding the Fed cut rates in September, or else. Why should the stock market do all the talking?
It reminds me of Sept. 29, 2008, when the House voted down a $700 billion financial rescue package after the Lehman Brothers implosion. The market dropped 777 points, losing $1.2 trillion in value, the first time more than $1 trillion was lost in a day. Congress got the message. The Emergency Economic Stabilization Act passed five days later and was quickly signed into law by President George W. Bush.
The market gets what it wants. Facebook traded down after its initial public offering because of concerns that it lacked a mobile strategy—then it quickly got one. Uber laid off 400 employees to try to stem its post-IPO slide, but the stock has kept declining, so expect even more layoffs. And it doesn’t take a crystal ball to see the day within a year of WeWork’s IPO that their stock sells off and they finally change their squishy cash-soaking business model. This is what public markets are good at: creating urgency.
Sure, this makes the stock market sound like a stubborn bratty child throwing a hissy fit. And that’s basically right.
So what scene does the market see today? Donald Trump and Xi Jinping are having a stare-down over trade, both puffing out their chests like roosters in a pit. Better yet, they are playing a game of chicken like James Dean in “Rebel Without a Cause,” each hoping the other will bail out first before they both go off a cliff. Mr. Trump pumped the brakes by delaying tariffs until the holiday shopping season is complete. Will Mr. Xi screech to a halt? His economy depends on U.S. dollars, and he has another problem in Hong Kong.
While Messrs. Trump and Xi stare, the world economy is slowing. The Economist says it’s about “anxiety.” Yes—specifically, anxiety about tariffs. China added $75 billion more on Friday, and Mr. Trump bumped some tariffs to 30%. No wonder companies are sitting on their hands.
There are other problems, to be sure. An inverted yield curve makes it hard for banks to lend profitably, so they won’t. There’s also trouble in the shadow banking business—the repo market is showing signs of a Treasury shortage. But tariffs are the big thorn in the economy’s heel. Federal Reserve Chairman Jerome Powell hears the market loud and clear, saying Friday he is “carefully watching developments” and “will act as appropriate.”
Expect the stock market to be more spasmatic, not less, until trade is resolved. The market may drop and the dollar may rise until the U.S. and China resume trade talks in September. A 1,000-point drop as a warning isn’t out of the question. What could get the stock market to jump for joy again, and make the bond market slope upward like it’s supposed to? A start would be for negotiators to write two words on a 5-by-7-inch index card and lay it on the table, forcing both sides not to leave until they agree. Those two words? ZERO TARIFFS.
