Unforced Errors

I have to make this quick but I want to mention it…

Here’s the CEO of Fedex, whose stock is tanking this morning after saying this, while slashing earnings and revenue guidance for 2009:

“This is very, very important, and I’ll just conclude by saying most of the issues that we’re dealing with today are induced by bad political choices, I mean, making a bad decision about a new tax, creating a tremendously difficult situation with Brexit, the immigration crisis in Germany, the mercantilism and state-owned enterprise initiatives in China, the tariffs that the United States put in unilaterally. So you just go down the list, and they’re all things that have created macroeconomic slowdowns.”

This past week, the Russell 2000 dipped below the 20% drawdown mark, representing a statistical bear market for small cap stocks, which are domestically focused companies. What Fedex is saying doesn’t just apply to global business. There is a global slowdown, a trade-induced slowdown and now a domestic weakness beginning to creep in. The S&P 500 gave up its 10% YTD gain and has since dipped as low as negative 5% on the year. The Nasdaq went negative too. Bank stocks were in a 15% drawdown at their lows this Monday. Semiconductors went off a cliff this fall. Homebuilding stocks have fallen 30% this year and the Transports are also in a statistical bear market from their highs.

Valuation didn’t help you in terms of portfolio construction this year. The cheaper stocks were actually hit the hardest. Why? Well, if they haven’t been performing well (as businesses) in a good economy where consumer demand was high and financing was inexpensive, then how will they do now, with money tighter, labor costs up and demand slackening? Low margin businesses with high labor costs and shrinking margins are cheaper than the FANG stocks, and yet, you can’t even give them away.

You can pile on the double-digit losses from developed and emerging market stocks all over the world.

There are tons of unforced errors happening politically in Washington and around the world. We’ll focus on the White House. The tariff experiment has so far been disastrous. Trumpworld spokespeople used the analogy of “playing with the house’s money” while instituting these policies last winter as the stock market was making new highs. The house’s money is now gone. The Dow is at a 14 month low and will possibly challenge the levels it traded at pre-election (and Trump Bump).

The Fed has an opportunity today to digest the sudden downturn in economic data that will surely give them cover. They could punt their next rate hike into early 2019, should it be necessary at all. I think they will. They have the data on their side, they don’t have to worry about looking like they were pressured by the President’s tweets. If they punt, I think the stock market recovers.

I’m going to throw one more thing at you – and this will be the first place you’ve heard this. I asked Michael, Nick and Ben to run the numbers early this morning. Has the Fed ever done a rate hike during this cycle where the stock market was down from the prior hike? Turns out yes, in early 2017. That was a different environment.

But here’s the money stat: the Fed has raised rates 99 times since 1970…this would be the worst drawdown since then between rate raises (roughly -12.6%). It’s never happened before.

The closest it has come is 1974, in the midst of a grueling battle with inflation the Fed did a rate hike during an 11% decline for stocks after the last hike. Since then, nothing even close.

The Fed faces no such grueling battle with inflation this time around. Wages are rising at a moderate pace. Oil prices, home prices and auto demand are plunging. The last two recessions were not caused by inflation or by people’s wages rising too fast. This is not the clear and present danger today.

No need for another unforced error.


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