The last article I wrote for Yahoo Finance two weeks ago, published on March 26th, was titled Stocks are vulnerable until Q1 earnings season gets underway. The closing sentence of that article was: “The Wildcard is President Trump.” Both of the weeks following the publication of that article were characterized by extreme vulnerability, weak price action and President Trump playing the role of wildcard.
After nearly two months of heightened volatility, extreme price dislocation, and dramatically-shifting equity investor expectations, we begin Q1 earnings season this week. At the outset of this week, it is clear that there are multiple factors likely to impact both the tone and direction of equity prices over the near term – this, away from earnings. And in some respects, it is that shift from a binary equation, based on economic data and earnings, to something significantly more open to subjective interpretation that has driven much of the disequilibrium present in markets.
Though several themes have driven recent equity market dysfunction and sliding prices, fear of trade wars and protectionism appear to have taken top billing. Increasingly driving panic into the trade war narrative has been the rapid escalation of its scope and size relative to US/China trading relationship.
The impact of a potential trade war between the world’s two largest economies would undoubtedly be enormous on global trade. US equity markets are making that case.
The fears of a potential trade have been compounded in recent weeks by the seemingly sudden realization by the general public that social media platforms have apparently been monetizing user data in ways that few had previously considered. In the process, consumers have suddenly discovered that rather than being that, simply consumers, they have actually become the product: a product, not unlike other products and commodities, that is sold by data aggregators to buyers that have found both political and economic use for their personal data. And as if that isn’t disturbing enough for many, the actual buyers of the data are unknown, and in some cases nefarious. The evolution of this conversation has led to the largest crisis in trust in the short history of social media–the result of which has led to calls for a collective re-examination of the contract between users and consumers, Congressional and Senate testimony, and a sharp selloff in prices.
In this large-cap technology landscape of distrust and re-examination, there is a uniquely Trumpian twist: Amazon. President Trump in recent weeks has gone to extreme lengths to publicly undermine consumer trust and comfort with a brand that has become nearly ubiquitous to American consumers. Amazon has, up until recently, enjoyed a high level of consumer trust and comfort. That valuable perch of trust enjoyed by Amazon has been radically upset by President Trump’s repeated calls for renegotiation of their contract with the USPS, his criticism of the Bezos control-owned Washington Post, and concern over negotiations involving the Pentagon and its aspiration for harnessing the cloud in scale.
Though our recent economic data has primarily remained very constructive and supportive of the broader market rally, Friday’s Employment Report for March was unexpectedly weak. In fact, it was the weakest monthly report in six months. Bloomberg consensus was a calling for a monthly gain of 175K. The initial reading was a weaker-than-expected 103K. However, February’s monthly employment gain was revised up to 326K from the initial 313k. It was a mildly mixed report. The official unemployment rate remained at 4.1%. Manufacturing payrolls rose by 22K. The Labor force participation rate came in at 62.9%. Average hourly earnings on both a M/M and a Y/Y basis rose 0.3% and 2.7%, respectively. Other data points that warranted investor attention last week included March’s ISM Mfg. Index which was a solid 59.3 and March’s ISM Non-Mfg. Index was also strong coming in at 58.
Investors have entered into a perilous stage of this long-running bull market. As indicated in all three charts below, all three major US equity market indices have traded sharply lower from their February highs, once again setting up markets for a retest of the lows established earlier in the year. The S&P 500 closed at its 200 DMA again on Friday, and both the Dow Industrials and Nasdaq Composite are within striking distance of that critical support as well. All three have been moving lower in tandem. Additionally, all three are now negative on a year-to-date basis and sport declining 50 DMA lines.