We all remember the Chinese curse, “may you live in interesting times.”
Just when we thought things were getting interesting under Mr. Trump’s unorthodox leadership, the interest meter has been cranked up a notch, or five.
However noble the quest to reset the US/China trading relationship – and there is no question that the Chinese have been snookering the world, taking advantage, cheating, and worse for decades now – some fear Mr. Trump may have overplayed his hand. Or, more accurately, his hands. With the first hand, he bets on reelection. With the second, he bets on accomplishing a really transformative grand deal with China that levels the playing field for a long, long time.
The double risk is that he has been so tough, and taken so long, that the sanctions and tariffs have harmed the economy too much, and the risks of recession are mounting.
And make no mistake, they are mounting. Much of the rest of the world is in or entering recession, and the US is clearly flirting with it.
So where does that put the market?
Stocks have taken a decidedly schizophrenic course since the late 2018 bear market, running hot and cold as greed and fear have replaced each other. Stocks have run up to near record highs, then plunged down again as investors absorbed new economic data, and decided they spelt bad news.
The big fear driving the market plunges has been fear of recession – stalled trade, crunched sales, and low profits, or even corporate losses.
Fear of recession is what has pushed the European Union and Japan to negative interest rates, and encouraged many in this country to push for the same, for lots of reasons. These reasons include lowering the value of the dollar against other currencies to make US good cheaper in export markets, and to lower the cost of borrowing for US companies and consumers so they can borrow and spend more. Spending gooses economic activity, and raises sales and profits.
While many pundits expect the US economy to soldier on, the risks of recession are much greater than before the trade war began. Recessionary signs are considered to be leading stock market indicators, meaning hard times mean hard markets, and the market can be expected to tank before the economy as a whole does.
Many worry that the market downdrafts we have seen beginning in the Fall of 2018 are signs of a coming recession.
The Fed has fought this by lowering rates a couple times this year – a big flip flop from policy in late 2018 – but there is only so much the Fed can do.
Too much now hinges on global trade, and much of this is in the hands of the current President. It is getting late in the game, but a fortunate turn of his cards may yet hit the gas and turn things around.
In any event, the recent turbulence has got “Mr. Market” thinking that maybe it makes sense to look at stocks that trade at attractive prices, and make sense as good business to invest in.
Value investing may be finally back as a market leader. That’s usually been a smart place to be in recessionary times and even in good times.
Regardless of which way things may work out, this could be the wake-up call smart investors have needed.