One day before 71-year-old President Donald Trump announced tariffs on aluminum and steel imports March 8, the Dow Jones Industrial Average stood at 24,884, nearly 1,200 points lower to its close today down 458 points or 1.9 %, telling the White House to stop counterproductive tariffs on foreign goods. Trump said March 22 he could win a trade war with China, something doubted by most economists. When China announced yesterday it would tariff some 128 U.S. imports, the trade war was officially on, unless Trump blinks, rescinding his tariffs on steel and aluminum. Watching the Dow slip below its 200-day moving average spells trouble for technical analysts monitoring the put-to-call ratio now above one. When puts [sell contracts] out number calls [buy contracts], it spells trouble for Wall Street, especially when when short-seller takeover market activity.
Instead of letting his Dec. 22. 2017 tax bill stimulate Wall Street, Trump mucked things up by starting a trade war with China and other countries, like Mexico, which enjoy a trade-surplus with the U.S. Trump’s comments about Amazon.com hurting brick-and-mortar stores in the economy by avoiding state tax laws drove down Amazon stock 75 points or 5.21%, sending the tech-rich Nasdaq skidding 193.33 points or 2.74%, triggering more high frequency short-selling. While Trump’s rocked markets talking about tariffs, he’s done so in an atmosphere or rising interest rates. When stocks show volatility, large hedge and private equity funds seek safe havens in Treasuring Bonds, reflecting today’s drop in the 10-year Treasury yield to 2.73% or a drop of 0.33%. When stocks go haywire, institutional investors shift asset allocations from equities to bonds, dropping bond yields.
When you consider inflation hawk Federal Reserved Board Chairman Jerome Powell hiking interest rates March 23, rising rates don’t bode well for stocks, especially if the market continues to meltdown. With fourth-quarter Gross Domestic Product rising to 2.5%, Powell expects more inflation, justifying the hikes. But with unsettling geopolitical factors and Trump’s new trade war with China and Mexico, the economy could head south quickly. Wall Street high-flyers like Tesla [TSLA] and Microsoft [MSFT] were hammered today, losing 3% and 5%, respectively. Trump plays with fire continuing his pro-tariff trade war policy. No matter how unfair trade deficits, there are reasons why some exporters get preferential treatment in the U.S. Taking cheap foreign import is precisely the sales strategy of most mass merchandisers and big-box retailers giving consumers cheap foreign goods.
Market watchers saw the S&P 500 down 10% in correction mode from its January high, closing today at 2,581,down 59 points or 2.23%. Whether the Federal Reserve Board wants to admit it or not, a prolonged sell off on Wall Street could result in negative GDP growth, maybe a recession. While recent economic factors like the 4.1% unemployment rate or recent salary gains are all positive, they could also evaporate quickly, hurting GDP growth. When you consider that the unemployment rate includes part-time employment and most employees have endured the burden of rising health care costs, there’s not much left at the end of the month. Add to that rising rents and real estate prices with today’s strict lending practices, average consumers remains squeezed, unable to spent freely in the consumers economy. Slapping tariffs on China and Mexico could kill the Golden Goose for Trump.
Dropping the Dow, Nasdaq and S&P 500 below their 200-day moving averages triggers short sellers, further driving down market averages. When you look at the increase put-to-call ratios now approaching three in certain sectors, there’s little to cheer about with recent rebounds. Enough short-selling could shift the 10-year-old bull market into a bear market, where the put-of-call ration remains well above one. Given the fragile nature of Wall Street, it doesn’t take much to cross the line into bear territory. While rallies do take place in bear markets, the trend line for stock valuations is down. To prevent the shorts from taking over markets, the government must do more than set aggressive fiscal policy, lowering corporate tax rates. Returning manufacturing or old industries to past glory won’t be easy for Trump or the GOP. Keeping the put-call ratio below one, Trump must stop rocking the boat.
Watching the Dow, Nasdaq and S&P 500 meltdown from January highs shows how easy it is see short-selling seize the markets. Wall Street doesn’t like uncertainty, especially geopolitical crises or expectations about trade wars. It’s not rocket science to figure out that hiking interest rates in an uncertain economic atmosphere is going to trigger Wall Street profit taking.. When the ultimate sell of happened in 2008 to 2009, taking the Dow down from 14,198 Oct. 11, 2007 to its closing low of 6,443 March 6, 2009, it plunged the U.S. economy into the Great Recession. To avoid that again, Trump must return to free market capitalism and stop monkeying around with tariffs and trade wars in countries with whom the U.S. has trade deficits. Neither Congress nor the Fed will be able to save the economy if Trump kills the Golden Goose, plunging Wall Street into another meltdown.
