MV Weekly Market Flash: A...
Three months ago, to the day, we wrote our first post-election commentary entitled “The Markets Are The Guardrails,” the idea being that whatever craziness might be going on elsewhere in the new administration, on the economic front at least their wildest ideas would likely be tempered by the reaction of stock and bond markets, about which these people, to a person, care deeply. So far, we would say that our prognostication back in November has been validated. There is plenty of crazy stuff going on elsewhere, and because our weekly commentary is about economics, not politics, we will leave it to others to delve into that side of things. Where the economy is concerned, though, the guardrails seem to be holding. By the numbers, neither equity nor fixed income investors should have much to complain about for the year so far – the S&P 500 is up and the 10-year Treasury yield is down for this time. Over the past three months, though, the main discernable direction is sideways, a whole lot of nowhere.
Tariff Kabuki
This past week has been an excellent illustration of the guardrails mindset, and the extent to which Wall Street appears to believe the supports will continue to hold. News hit the airwaves last weekend that those 25 percent tariffs against Canada and Mexico that had been floated earlier were, indeed, going to come into effect this week. “On Tuesday” was the promise. Equity futures markets plunged while financial opinion columnists provided a refresher course for investors on how far stocks have to fall before the market’s circuit breakers come into effect to temporarily halt trading (at three escalating levels of 7, 13 and 20 percent down from the open). Markets don’t like tariffs for all the reasons we have discussed many times in these pages, mainly because they are likely to put upward pressure on inflation and downward pressure on growth, otherwise known as stagflation.
On Monday the Wall Street Journal, not exactly a mouthpiece for the anti-capitalist left, featured an article the headline of which read “The Dumbest Trade War In History.” Something else the Trump administration cares about, alongside the performance of financial markets, is critical press coverage (much as they may be loath to admit it). Now, there is no obvious causal link between the WSJ headline and the announcement, about an hour into trading on Monday, of a “pause” in the tariffs with Mexico (and then, shortly afterwards, likewise for Canada, in both cases on fairly flimsy pretenses). No matter – the market quickly formed the consensus opinion that the guardrails had held again and prices never came near those circuit breaker levels. This is not to say that we have heard the last of the tariff threats – far from it. We expect this will continue to play out like a Japanese Kabuki drama for months to come – lots of histrionic shouting and dramatic movements, but in the end more performative than real. We may be wrong about that, and so might the market. But for now, the “guardrails will hold” mindset is the common wisdom.
Waiting For Tax Cuts
If the perceived guardrails against punitive tariffs form a kind of downside support level for stocks, then the upside formula largely concerns tax cuts. Lots of things that governments do have no bearing whatsoever on the market, but the one thing that always draws the spotlight is a new round of tax cuts. These are currently percolating as congressional Republicans try to put together a budget reflecting the administration’s economic priorities, and being Republicans, tax cuts are front and center (though, interestingly, the carried interest loophole so beloved of hedge fund and private equity titans is rumored to be on the chopping block – we’ll believe that when we see it). Extension of the 2017 corporate and individual tax cuts with perhaps some new ones as well may give stocks enough upside to push through the sideways corridor that has persisted for the past three months.
That upside may be short-lived, though, come March 14, which is the latest deadline for government funding approval. Noises are starting to emerge from the hitherto-quiescent Democratic side of the aisle that approval may not be forthcoming given what has been going on elsewhere in the federal government over the past two weeks (i.e., that “crazy stuff” we noted above that markets normally ignore). It’s too early to tell how serious these threats might be, but bear in mind that the very slim margin of Republican control in the House means that Democratic votes will ultimately be necessary to avoid a shutdown. Stay tuned, for there is never a dull moment.