It all falls down: Wall Street hit by trade, rate fears
Stocks are slumping hard again Friday morning, threatening a retest of February's panic lows as the Dow Jones Industrial Average loses its critical 50-day moving average. The pattern on the Nasdaq Composite looks worse, with a possible "double top" formation that could presage weakness for ultra-popular big-cap tech stocks like Amazon (AMZN) and Apple (AAPL).
The "Goldilocks" situation that stock bulls enjoyed for so long is well and truly over. Because President Donald Trump and the Federal Reserve have now turned against them.
No longer is the focus on tax cuts and pro-growth deficit spending nor on low inflation and cautious rate hikes. Instead, headlines are filled with worries about trade tariffs, wage-push inflation and a shrinking Fed balance sheet. And that means stock prices are likely headed even lower.
Thursday's losses deepened Friday morning after Mr. Trump announced his intention to impose tariffs on imported steel and aluminum of 25 percent and 10 percent respectively. Following tariffs on solar panels and washing machines, the president's trade posture is becoming increasingly hawkish. Trading partners aren't happy. Chinese officials warned they were "seriously concerned" about the issue while European officials threatened to retaliate with countermeasures.
Adding to the pressure was more hawkish commentary from the Fed, with New York Fed President Bill Dudley opening the door a little wider to four quarter-point rate hikes this year while chairman Jerome Powell warned he didn't want to "get behind the curve on inflation."
This follows comments from Powell earlier in the week that the data seen since the Fed's December policy meeting gave him confidence inflation was set to rise. This increased the market's expectation that the current estimate for three quarter-point rate hikes this year was too conservative.
The latest report on personal income and spending supports this outlook. Paul Ashworth at Capital Economics noted that the data showed "underlying inflation accelerating" something that is likely to keep the Fed on the tightening path to the market's chagrin.
All of this is self-reinforcing: Tariffs will boost import prices, pushing inflation higher and forcing the Fed to tighten rates more aggressively.
"Fears of inflation accompany tariffs, as higher import levies may serve as de facto consumption tax, pressuring output," said John Lynch, Chief Investment Strategist for LPL Financial. "Initial estimates suggest that tariffs, if enacted and sustained over the course of one year, could reduce GDP by up to 0.25% this year."
Gluskin Sheff's David Rosenberg sums it up well: "Tariffs. Sharp bond selloff. Weak dollar policy. Massive twin deficits. New Fed Chairman. Cyclical inflationary pressures. Overvalued stock markets. Heightened volatility. Sounds eerily familiar (from someone who started his career on October 19th, 1987!)."
If the market's gyrations are making you nauseous, you're not alone. The market rallied more than 1 percent last Friday and on Monday. Then, it was followed by three declines of more than 1 percent. The pattern is rare, even excluding Thursday's loss, according to SentimenTrader's Jason Goepfert. There have been 23 occurrences of it since 1928.
All but three occurred during bear markets.
