Wall Street’s money machine was on full display this week with fund managers taking advantage of market volatility, selling on peaks and buying on dips. When traders use arbitraging to make profits, long-term investors can only sit back hopelessly, watching Individual Retirement Accounts [IRAs] and 401Ks gyrate like yoyos. Wall Street’s spin machine finds anything possible to blame market volatility, this week on President Donald Trump’s trade war with China, or, more importantly, Federal Reserve Board Chairman Jerome Powell’s outlook on hiking rates in 2018. While trade wars and rate hikes aren’t good for Wall Street, traders often arbitrage [sell on peaks and buy on dips] to lock in quick profits, while small investors pull their hair out. Losing 572 points today, the Dow Jones Industrials Average, ended a volatile trading session at 23,932, down 2.24%.
Blaming Wall Street’s ups-and-downs on external factors, like interest rates or trade wars, ignores traders’ practice of arbitraging . Only minutes before the Dow ended down 572 points, it was over 767 points down, proving that traders arbitraged the difference between the dip and the short-term peak. Closing 130 points higher to end down at 572, Wall Street revealed what it does so well: Take profits. Ending the session gaining 130 points proves that traders aren’t worried about Trump’s trade wars or whether Powell hikes rates. If markets were really reacting to trade wars or rising interest rates, they wouldn’t rebound so quickly. April 4 revealed another glaring arbitraging day with the Dow opening 500 points down, only to end the session 400 points up, a turnaround of 900 points. There’s no better example of arbitraging that watching traders sell on peaks and buy on dips.
When the Dow gained 284 points to close at 24,264 April 5, traders knew today it was time to unload shares today, driving the Dow down some 767 points before rebounding to 572 points down. If traders were really worried about trade wars or rising interest rates, short-sellers would drive the market down, establishing a bear market. Extreme volatility or arbitraging can spell and end to a bull market, something that’s been going since March 9, 2009 when the Down dropped from a peak Oct. 9, 2007 of 14,164 to its March 9, 2009 low of 6,547. While no one says that same bear market is starting now, the volatility and arbitraging indicates that traders are refusing to hold long positions. Markets swung wildly this week, gaining 1,300 points, before giving back all of the gains, losing 0.7% for the week. Markets headed south starting yesterday when Trump announced another $100 million in new China tariffs.
Trying to make sense of markets isn’t easy, especially for long term investors looking to re-balance portfolios to prevent future losses should markets move into bear territory. “I think it shows a willingness go to the mat on this and fight it out,” said Jason Pride, chief investment officer for Glenmede’s Private Client Business. Pride thinks both Trump and Chinese President Xi Jinping are playing games with tariffs, knowing they represent a tiny fraction of trade between the two superpowers. How far Trump plans to take the trade war with China is anyone’s guess. Some see Trump as bluffing to get China to make concessions to reduce the $500 billion trade deficit. But with U.S. businesses having a voracious appetite for cheap Asian goods, it’s doubtful a trade war would benefit either side. Iowa hog farmers are certainly worried about new tariffs hurting business.
When Trump signed the new tax bill Dec. 22, 2017, markets went into rally mode expecting benefits from dropping corporate tax rates from 35% or 21%. Rising from 24,742 Dec. 22, 2017 to its record high of 26,252 Jan. 28, Wall Street rallied until Trump started talking about China tariffs. By Jan. 28, the Dow had fallen nearly a 1,000 points to 23,860, almost to where it is today at 23,932. Today’s 572-point swoon dragged down the 10 Year Treasury Bond yield from 2.83% to 2.77%, showing that fund managers were moving from equities to bonds. With gold rising to 0.66% to 1,337 per once, investors seek safe havens from what looks like more Wall Street volatility. While the Volatility Index [VIX] remains low at 21.49, investors still aren’t sure whether the bull market has ended. More talk of trade wars at the White House or higher rates at the Fed doesn’t help the bull market.
Before Trump and the Fed kills the Golden Goose [Wall Street], the White House should show more restraint with its spat with China. Trump could dial back the trade war with China at any time, giving Wall Street traders the green light to buy back stocks. Watching today’s anemic jobs report for March adding 109,000, Powell might also dial back his 2018 plan to hike the Federal Funds Rate. If Trump and Powell come to their senses, they could offset the transition from a bull to a bear market. Too many more bad signals from the White House or Fed could trigger a short-selling binge, repeating the calamity of 2007 to 2009. With tax cuts bound to repatriate oodles of cash in the U.S. and Trump committed to bring back manufacturing, Wall Street should continue its upward trend. Trump and Powell can send markets to new heights or pave the way to the next bear market and recession.
