The prospect of deepening trade tensions, a new round of interest hikes and intensifying criticism of Facebook and its mishandling of user data has the markets riled up.
Over 48 hours between March 25th – 26th the DJIA shed almost 1,000 points or nearly 5%. Coming off of a high of over 26,000 in January, the Dow is close to correction territory; meaning it has declined over 10% off a recent peak, at the time of writing.
Markets remain skittish and the unsettling news is an unfamiliar jolt for an investment community that has grown accustomed to low-interest rates and steady market improvement.
So, let’s summarize our disappointing March:
- Tech is under pressure.
- The Fed wants to nip any inflationary concerns by curtailing spending.
- And trade tensions are prompting new fears that a U.S. China spat might depress global trade.
Tough realities to deal with, and for investors, they beg a question: does it stop here?
Are the intensifying criticisms around user data going to be resolved with simple sharing and privacy control changes at Facebook, end of story?
Will China’s new economy czar Vice Premier Liu He retaliate by assigning his own tariffs to U.S. goods and drag domestic, Asian and global markets into an escalating trade war? Or does this dispute simply set the stage for fresh trade negotiations?
Is the Fed activity part of a healthy economic maintenance plan to keep inflation and future problems at bay? Or will plans for raises hurt consumers and reduce buying activity, slowing the economic momentum markets have enjoyed?
Let’s look at the fed, Facebook and fight over trade. Are these F-words actually of the four-letter variety – and how should responsible investors interpret each in the days to come.
The Fed
New Federal Open Market Committee chairman Jerome Powell made a splash in his public debut, announcing a 25-basis point raise to the federal funds target. Buoyed by a strengthened economy, low unemployment and growing GDP, Mr. Powell announced the raise, saying: “I don’t think that recession probabilities are particularly high right now.”
I listened to him this week and came away impressed. Mr. Powell is everything you want in a Fed chairman: calm, collected, reasonable and data-driven. He acknowledges the need for measured rate activity to keep the economy humming and recognizes that economic forecasts can change, so the Fed could be “a little less gradual or a little more gradual.”
Gradual being the keyword.
The Fed has no interest in slamming the breaks on growth.
Verdict: The Fed is not to be feared. Even incremental rate activity in the coming year is important for continued market health. The U.S. is in good hands.
My team has talked for months about tech entering the political crosshairs. I guessed that Amazon would be a prime target (no pun intended…), pursued for the monopolistic threat it poses to retail business everywhere. The company has sparked the ire of President Trump again too, who blasted the company on Twitter just this week for its apparent use of tax loopholes.
From Macy’s to Toys ‘r Us and Barnes and Noble, no brick and mortar or e-retail company has escaped the market-share disintegrating power that Amazon has. And last year, the company sold six times as much online as Walmart, Target, Best Buy, Nordstrom, Home Depot, Macy’s, Kohl’s, and Costco did combined.
Now, with its acquisition of Whole Foods, grocers are officially on notice.
It is getting into financial services, eyeing pharmaceuticals and disrupting transportation.
It publishes books, manufactures hardware and boasts an impressive line of its own designer clothing.
The U.S. has a history of protecting public interest and trying to control disproportionate economic power. The Sherman Act of 1890, the Clayton Act of 1914 and the Federal Trade Commission Act of 1914 all restrict monopolies, unfair M&A, and other collusive practices. Today, the public is quickly digesting just how much power is concentrated inside AMZN and what the competition stifling behavior actually means.
With respect to Facebook, the point is that intense public and regulatory pressures appear to be mounting against tech behemoths. In an effort to open the floodgates of technological innovation, American lawmakers have applied a soft regulatory touch and have generally stayed out of the way. Facebook has taken advantage of this and now controls an incredible amount of personal data; while Congress has made few efforts to manage this or apply any anti-trust law to limit anticompetitive activity.
Disregard for enforcement and privacy, especially as the company is under fire for letting its ad network be exploited during the fake news election scandals, may finally invite a heavy-handed regulatory response. Perhaps a harkening back to the story of IBM and the Department of Justice battles that leveled the company for over a decade.
Fear of Trade War
Tensions jumped last week as President Trump ordered tariffs on about $50 billion worth of Chinese goods. This came just weeks after announcing sanctions on steel and aluminum imports in an attempt to reduce the trade deficit between countries. Meanwhile, Beijing has responded with plans to target $3 billion worth of US products and some thinly-veiled warnings.
But from my seat, this conversation is more about posturing and shifting economic expectations, than it is about threatening all-out trade war. Our economies are too intertwined, too mutually dependent, for this to make sense.
And while $50 billion and $3 billion sound like a lot, they aren’t enough by themselves to truly move the national financial needle in either country. The Financial Times shared the perspective from a former coordinator of China affairs at the US Treasury who remarked: “…tariffs won’t have much impact on a country’s overall trade balance. It’s like a water balloon. If you restrict one end it just flows somewhere else.”
His point is that the tariffs are more politically-devised; their intent is to unlock what Trump really wants. That is: that Chinese markets be more friendly to foreign investors, the country steps up its semiconductor purchasing and reduces practices that result in U.S. company intellectual property theft.
Of course, the tit-for-tat tariff talks are headline grabbing. While economically insignificant for now, they create choppiness in the markets and materialize into broader negative market perception.
What investors need to keep in mind is the other economic events that dwarf the simmering trade disagreements. I wrote earlier about recent GOP-driven tax cuts and how Trump’s package will deliver an immediate $205 billion boost to the U.S. economy in 2018 – equating to over 1% of U.S. GDP. Of this, $120B will come in the form of individual tax cuts, while $85B will go to corporations. This is the second largest tax reform package in U.S. history, behind only Reagan’s 1981 cuts and decidedly larger than the Bush cuts in 2003. Congress also imposed a limited time, reduced tax rate on overseas cash. Some $2.6 trillion of unremitted foreign earnings from U.S. companies are sitting overseas and it is expected that $500-$700 billion of repatriated profits will be put into play in the economy.
Verdict: The trade war is about showmanship. It lacks real economic bite, for now.
Of all the things playing into recent market upheaval, I believe the Fed activity and trade war talks are just noise.
It’s Facebook and new tech that are worrisome. For too long, these companies have had callous disregard for anything but profit. They’ve enjoyed little legislative oversight, made their bed and now, as their day of reckoning nears, may have to sleep in it.
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