March 22, 2018

Stocks opened sharply lower this morning (Dow -366 pts; SPX -1.3%) on trade war fears. It looks like the SPX wants to re-test its recent correction low. The tech sector is under pressure again today (-2%) as a result of Facebook’s (FB) user account data leak incident, which made its way back into headlines on Monday. Traders are using this as an excuse to take profits across the entire sector. Make no mistake, fundamentals are in the back seat today and traders are taking the lead. That’s why volatility is exploding so quickly. Everything could turn on a dime, however, so don’t be surprised if stocks end the session in the green. Most sectors are down over 1% in early trading. Only consumer staples, real estate and utilities are in the green. European markets are poised to close down about 2% and Asia was mostly lower overnight. Emerging markets stocks are getting hammered (-3%). WTI crude oil is down 1% to $64.50/barrel. Bonds are performing well as yields plunge. The 5-year and 10-year Treasury note yields are hovering around 2.61% and 2.81%, respectively. 

President Trump is expected  to announce a package of trade tariffs against China totaling about $60bil per year. The aim is to penalize China for theft of intellectual property. This is a little like trying to penalize California drivers for speeding. CNBC points out that by law, China can only be charged for the dollar amount of harm they’ve caused the US when stealing intellectual property, as found by the US Trade Representative. But current Trade Rep, Robert Lighthizer, has said Mr. Trump will make the final decision. 

The Federal Reserve wrapped up its monthly policy meeting yesterday. This was Jerome Powell’s first meeting as Fed Chair. In the lead-up to the meeting, the 2-year Treasury Bill yield moved up to 2.34%, the highest since the Fall of 2008.  Investors are slowly getting used to the idea that the Fed is incrementally more hawkish these days. And that’s what we got yesterday. The Federal Open Market Committee (FOMC) decided to raise its Fed-funds interest rate by .25% to a target range of 1.5% – 1.75%. That was expected. Further, the Fed forecasts another two rate hikes this year (again, expected). But with another three hikes in 2019 and two more in 2020, Mr. Powell is implying a Fed-funds rate around 3.6%. That’s probably higher than investors wanted to hear. Economic forecasts were raised slightly, calling for 2.5% GDP growth this year and 3.9% unemployment. Interestingly, though, Fed inflation forecasts didn’t budge. So even though the Fed expressed more confidence in the economy, it’s also easier to see that they could possibly end up killing the bull market with rate hikes.   

Existing home sales rose 3% in February from prior month levels to an annualized rate of 5.54 million transactions. That’s about equal to the average rate over the last year-and-a-half. Economists are generally throwing out this report because last month’s home sale contract signings were pretty weak. We don’t put that much confidence in any single month’s data, but prefer to look at trends. And the trend is healthy. 

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