Is this stomach-churning rollercoaster the stock market’s new normal? After a stretch in which investors ignored earth-rattling threats at home and abroad as they pushed stock prices ever higher, the past week of deep lows followed by Tuesday’s sharp rebound is reviving the possibility the market will start looking as unsettled as the political moment.
Its fate turns on whether solid economic fundamentals can restore the stock market’s steady climb or if fear — of a bull market that’s past its sell date, of rising inflation that could prompt the Fed to hike interest rates faster, or of fear itself — will usher in a new era of turbulence.
As Reuters’s Lewis Krauskopf writes: “Bulls argue that strong U.S. corporate earnings, including a boost from the Trump administration’s tax cuts, will ultimately support market valuations. Bears, including short sellers that bet on the market decline, say that the market is over-stretched in the context of rising bond yields as central banks withdraw their easy money policies of recent years.”
Count Ivan Feinseth, chief investment officer at Tigress Financial Partners, among the bulls. "We’re still in an upturn,” he tells me. "The bullish fundamental tailwinds of global growth, low unemployment, strong earnings growth, and the increase in cash flow from the lower corporate tax rate are all positive, and those trends all still in place… I believe the bull market is still intact, and any significant sell-off is a buying opportunity.”
On the other hand, Nicholas Colas, co-founder of DataTrek Research, argues the choppiness will prevail for a while. “We’re in a new era of volatility,” he says. He points to “uncertainty about interest rates and what the right valuations should be in a rising-rate environment,” but also to a structural issue that quietly played a critical role in the market’s wild swings this week. It centers on volatility itself.
For years since the financial crisis, investors have been piling into trades around Wall Street’s volatility index, otherwise known as the VIX, or the fear gauge. It has spawned a cottage industry of day traders, including a former Target manager who made himself millions betting the index would continue falling.
The Wall Street Journal’s Asjylyn Loder and co. explain: “The strategy has been enormously profitable as the stock market surged and volatility remained muted… But those strategies amplify stock losses when markets turn, as investors learned Monday night, when [two instruments used to short the index] lost more than 80% of their value in after-hours trading.”
The collapse of those products helped drive the broader mess, as Colas wrote in a Monday note to clients: “In a market already up to its eyeballs with fundamental questions of valuation and interest rate uncertainty, seeing $3 billion of value evaporate is no one’s idea of a good thing… Assuming volatility-related ETFs really are a market structure ‘Achilles heel’, this will take days if not weeks to play out, and there could be other problems waiting in the wings.”
Indeed, as my colleague Heather Long notes, despite Tuesday’s rally, history suggests we could be in for a longer ride: “We’ve only had three days of selling. Since 1945, the typical length of a correction is 71 trading days — or about 2.5 months, according to MarketWatch. The last correction started in the summer of 2015 and lasted about half a year. It's still possible we could see the market close in correction later this week or month.”
Meanwhile, Asian markets didn't sustain the Dow's rally yesterday, per The New York Times: "After a strong increase in share prices in New York a day earlier, stock markets in Asia and Europe lacked a decisive direction on Wednesday, with some up, some down and some little changed. Analysts said that investors were trying to work out whether big declines in previous days signified a mere speed bump or the beginning of a roller-coaster ride."
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— U.S. stocks rallied, yesterday anyways. The Post's Steven Mufson and co.: "U.S. stocks bounced up in the final hour of trading Tuesday after a rocky morning that saw the Dow Jones industrial average dip into correction territory. After a big swing of more than 1,168 points during the day, the Dow landed up 2.3 percent, or 567 points, to finish at 24,913. Still, the blue-chip index is off to its worst month in eight years... While navigating volatile trading, money managers urged investors to keep calm, noting that the U.S. and global economies remain strong."
— Mnuchin: Don't blame the deficit. Bloomberg's Saleha Mohsin and Liz McCormick: "Treasury Secretary Steven Mnuchin said the U.S. government’s plan to borrow what analysts expect to be more than $1 trillion this year isn’t contributing to volatility in markets. 'I don’t think that’s had an impact on the market at the moment,' Mnuchin told reporters at the Capitol on Tuesday. 'The debt markets are one of the most liquid markets in the world and are reacting very well.'"
Politico's Zachary Warmbrodt:
— Icahn warns. Reuters: "Billionaire activist investor Carl Icahn warned on Tuesday that investors have exposure to “way too many derivatives” and called the stock market’s nosedive just “rumblings of an earthquake... The market is really not a place for the average person to be playing around with derivatives,” Icahn said on CNBC. “Today, you have these triple-leveraged ETFs that are crazy.”
— But the economy is fine. NYT's Neil Irwin: "What is the stock market telling us with its precipitous drop over the last several days? In all likelihood, not much of anything... For what really matters — the well-being of the economy and the ability for individuals and companies to prosper in the years ahead — look first to fundamental economic data, especially those that tend to be leading indicators. Second, look to the bond market and other financial market indicators that are more reliable measures of investors’ expectations than stock prices. There is good news on both fronts, as both point to a global economy that will continue growing steadily in the months and years ahead, perhaps with inflation that is a bit higher than in the recent past. That contrasts this market sell-off with drops in 2011, 2015 and 2016, which coincided with pessimistic signals in both economic data and the bond market."
— IPO market crunched. WSJ's Maureen Farrell and co.: "The IPO market can’t catch a break. After a protracted stretch in the dumps, January was a record month for U.S. initial public offerings as the strong equity market encouraged a slew of companies to list their shares. But the turmoil that erupted last week threatens to stop that momentum in its tracks. It also raises questions about whether a strong run in merger activity will continue. No fewer than 11 companies were planning to debut on U.S. exchanges this week and raise a total of about $1.8 billion, according to Dealogic... So far this week, at least one company has postponed its IPO."
— Main Street feels inflation. The Post's David Lynch: "Wherever Bob Humphreys looks, things are getting more expensive. The chief executive of Delta Apparel, a Greenville, S.C., clothing maker, sees higher costs at every link in a multinational supply chain: Raw materials, such as cotton; energy to run his factories; transportation to move his goods to market — all are getting pricier. With higher wages looming, he’s passing on some of those extra costs by raising prices on Delta Apparel’s plain and decorated T-shirts and fleeces. That’s exactly what spooked Wall Street this week... A pair of recent government reports showing that American workers were finally enjoying sustained pay raises convinced many on Wall Street that the economy — for the first time in a long time — was in danger of overheating."
— Washington Googles, via DataTrek: "Worth noting: zoom into the Google Trend analysis for just today, and you’ll see that Washington DC was the epicenter of incremental searches for “stock market” over the day. New York and California – two states with large concentrations of investors – were #3 and #4. Make no mistake: retail investors were a major reason stocks made all time highs in January, and they will be a piece of any further selloff. As for the unusually high levels of attention in DC over the market swoon, only time will tell if those searches came from the new occupant of the big office at the Federal Reserve, or elsewhere."
— Jason Furman: Why presidents shouldn't talk stocks, via Politico: "There’s nothing wrong with being optimistic about America’s economic future—just like Obama was in March 2009 and Trump was throughout his first year in office. This optimism may even have some short-run benefits, as increased consumer and business confidence over the last year may have contributed to a pickup in economic growth. But absent firmer foundations such confidence-fueled booms are rarely sustainable and long-lived, especially when the economy is close to producing at its full potential, as the U.S. economy is today. Using day-to-day stock market movements as a proxy for expressing this confidence is, however, a financial, economic and likely political mistake."
— Budget deal in sight that may lift the debt limit. The Post's Mike DeBonis and Erica Werner: "Top Senate leaders were working Tuesday to finalize a sweeping long-term budget deal that would include a defense spending boost President Trump has long demanded alongside an increase in domestic programs championed by Democrats. As negotiations for the long-term deal continued, the House passed a short-term measure that would fund the government past a midnight Thursday deadline and avert a second partial shutdown in less than a month. The House bill, which passed 245 to 182, would fund most agencies through March 23 but is a nonstarter in the Senate because of Democratic opposition.
Possibly part of the deal: "... an increase in the federal debt limit, which could be reached as soon as early March, according to the Congressional Budget Office. The aides said that an increase was being discussed in the negotiations but that no final decisions have been made."
Trump unbothered. NYT's Thomas Kaplan: "Trump called on Tuesday for shutting down the federal government if Congress does not crack down on illegal immigration ... 'I’d love to see a shutdown if we don’t get this stuff taken care of,' Mr. Trump said at a meeting with lawmakers and law enforcement officials to discuss gang violence. 'If we have to shut it down because the Democrats don’t want safety,” he added, “then shut it down.'"
(Virginia Republican Rep. Barbara Comstock confronted Trump over the comments, The Post's Jenna Portnoy reports.)
And House Dems nix retreat for budget, immigration talks. The Post's Paul Kane: "... party officials wanted to avoid the appearance of leaving town for a resort on Maryland’s Eastern Shore while those key issues entered the final phase of talks. Instead, Minority Leader Nancy Pelosi’s caucus will hold its breakout sessions and meetings inside the Capitol complex, allowing the California Democrat to sneak away to any key bipartisan talks at the leadership level."
— Republicans not worried about overheating economy. NYT's Jim Tankersley: "Republicans are pouring government stimulus into a steadily strengthening economy, adding economic fuel at a moment when unemployment is at a 16-year low and wages are beginning to rise, a combination that is stoking fears of higher inflation and ballooning budget deficits.The $1.5 trillion tax cut that President Trump signed into law late last year, combined with a looming agreement to increase federal spending by hundreds of billions of dollars, would deliver a larger short-term fiscal boost than President Barack Obama and Democrats packed into their $835 billion stimulus package in the Great Recession.
The administration is also expected to soon roll out its $1.5 trillion infrastructure package, which would include $200 billion in new federal spending, offset by unspecified cuts elsewhere. The question is how much added fuel is good for the economy."
— Infrastructure plan coming Monday. AP's Ken Thomas: "Trump is expected to release Monday his $1.5 trillion infrastructure plan, a top administration priority in 2018 that will rely heavily on state and local governments, as well as private investors. A White House official said the administration’s plan would include principles for generating private and public investment, cutting the regulatory process from 10 years to two years and outlining funding for projects in rural America."
— Trade deficit with China hits record. NYT's Ana Swanson: "The United States trade deficit with China climbed to its highest level on record in 2017, a trend that could prompt the Trump administration toward tougher trade actions in the coming months. The gap between Chinese goods imported to the United States and American goods exported to China rose to $375.2 billion last year, up from $347 billion the prior year, data released Tuesday morning by the Commerce Department showed. The overall United States trade deficit in goods and services with the world widened 12.1 percent to $566 billion last year, the largest gap since 2008. Economists said the growing trade deficit stemmed largely from the strength of the United States economy, which helped American consumers afford more imported electronics, clothes and appliances. The declining value of the dollar last year, which makes American products cheaper to buy overseas, also helped to lift exports, but not enough to prevent the gap from widening."
Last year's trade deficit was highest since 2008. AP's Paul Wiseman: "The Commerce Department reported Tuesday that the U.S. trade deficit in goods and services rose 12 percent to $566 billion last year, biggest since 2008. A record $2.9 trillion in imports swamped $2.3 trillion in exports last year."
— Mnuchin on the Hill. The Treasury secretary testified before the House Financial Services Committee on Tuesday, and was on the receiving end of some characteristic heat from the panel's Democrats. Some highlights:
Via ABC News:
Rep. Maxine Waters repeatedly presses Treasury Sec. Mnuchin on Russian sanctions passed by Congress last year. "This is your excuse for not having implemented the law?" https://t.co/CFdzczE0fE pic.twitter.com/rrw6aICBhb— ABC News Politics (@ABCPolitics) February 6, 2018
NYT's Alan Rappeport:
Mnuchin himself tweeted following the hearing:
I appreciated the opportunity to discuss key Treasury priorities, including the 2017 report of the Financial Stability Oversight Council, with lawmakers on the Hill today. pic.twitter.com/414yKNWFTD— Steven Mnuchin (@stevenmnuchin1) February 6, 2018
— The man behind the dossier. The Post's Tom Hamburger and Roz Helderman: "In the fall of 2016, a little more than a month before Donald Trump was elected president, Christopher Steele had the undivided attention of the FBI. For months, the British former spy had been working to alert the Americans to what he believed were disturbing ties Trump had to Russia. He had grown so worried about what he had learned from his Russia network about the Kremlin’s plans that he told colleagues it was like 'sitting on a nuclear weapon.'... Those who believe Steele consider him a hero, a latter-day Paul Revere who, at personal risk, tried to provide an early warning about the Kremlin’s unprecedented meddling in a U.S. campaign. Those who distrust him say he is merely a hired gun leading a political attack on Trump. Steele himself struggled to navigate dual obligations — to his private clients, who were paying him to help Clinton win, and to a sense of public duty born of his previous life."
— Scuffle over Dem memo. The Post's Karoun Demirjian: "Lawmakers are confident President Trump will allow the release of Democrats’ rebuttal to a GOP memo alleging federal law enforcement abused its surveillance authority, and they have begun arguing over which party should be blamed for redactions the government has yet to make. Democrats have warned the president against scrubbing any more classified information from their document than the FBI and Justice Department recommend, saying the context is necessary to refute the GOP’s allegations. Their 10-page memo includes more classified information than the four-page GOP memo the House Intelligence Committee made fully public Friday. House Republicans say they suspect the Democrats of designing their memo to require so many redactions that they can later accuse Trump of muzzling their rebuttal for political purposes."
— Regulators want more power over cryptocurrency exchanges. The Post's Brian Fung: "Asked by federal lawmakers Tuesday whether they had enough authority to shield cryptocurrency investors from scams, market manipulation and abuse, top officials from the Securities and Exchange Commission and the Commodity Futures Trading Commission said that the agencies were still consulting with other U.S. officials but that they may need more legislative authority. 'When you have an unregulated exchange, the ability to manipulate prices goes up significantly,' said SEC Chairman Jay Clayton. 'Just a few coordinated sales can change the price.'"
AFP's Michael Mathes:
Sen. Mark Warner (D-Va.):
I was an early investor in cell phones back in the '80s, and I believe #blockchain has the potential to be just as transformational as cell phones. As our government begins to look at #crypto, I don't think you can separate #cryptocurrencies from the technology they're based on. pic.twitter.com/EneUMfcgJ3— Mark Warner (@MarkWarner) February 6, 2018
— Pawlenty leaving FSR. Politico's Zachary Warmbrodt and Daniel Strauss: "Financial Services Roundtable CEO Tim Pawlenty will step down from the trade group in March amid speculation that he might campaign for another term as Minnesota's governor. In a memo to the association's members obtained by POLITICO, Pawlenty said, "it is time for me to begin my next chapter." He was named head of the trade group in 2012.
For months, sources familiar with the organization's operations had expected that he would run for office again after serving for two terms as Minnesota's governor and campaigning for the GOP presidential nomination. He has not thrown his hat in the race for the Minnesota Senate seat once held by Al Franken, but he has been floated more recently as a potential candidate for governor. 'As has been publicly reported, I am exploring that as an option but certainly haven't made any decisions in that regard,' Pawlenty said Tuesday in an interview with Fox Business Network's 'Cavuto: Coast to Coast.'"
"How rising inequality hurts everyone, even the rich," via The Post's Christopher Ingraham:
- The Asia Society holds an event on “The Broken Multilateral Trade Dispute System."
- The Hudson Institute holds an event on “The Chinese Economics and Trade Challenge to the West: German and U.S. Perspectives."
- The Urban Institute holds an event on the role of financial technology in financial service markets on Thursday.
- The Washington International Trade Association holds an event on the congressional trade agenda on Friday.
- The Peterson Institute for International Economics hosts an event on “Charting Europe’s Path Forward” on Feb. 13.
From The Post's Tom Toles:
How can Congress avoid another government shutdown?
No, wages didn't just start rising when Trump was elected:
Lawmakers weigh in on whether Trump should meet with the special counsel:
Watch Stephen Colbert on why Trump doesn't want to talk to special counsel Robert Mueller: