Stocks headed lower again this morning on (what else?) trade war headlines. The Dow is currently down 350 pts and the SPX is down .7%. All eleven major market sectors are lower, led by tech (-1.2%) and materials (-1.3%). The VIX Index spiked to nearly 22, suggesting traders are getting nervous. European markets closed down by nearly 2% and Asian markets were down nearly that much overnight. China’s Shanghai Composite Index was down 1.5% last night and has fallen almost 13% since April 19th. Commodities are down today, except for gold. WTI crude oil is down 1% to trade around $61.50/barrel. Bonds moved higher as the 10-year Treasury yield fell back to 2.44%. Junk bonds, however, are down about .4%.
President Trump, in a speech last night, blamed China for breaking the nearly completed trade deal. There was an air of finality to his comments, which seemed to imply that China’s Vice Premier Liu He is wasting his time by flying to Washington for a one-on-one negotiation with US officials. A CNBC headline yesterday announced that China has gone back on nearly everything previously agreed to. None of this suggests that a deal can reached in the near term, but that’s impossible to guess.
Bloomberg reports the Treasury bond yield curve has “inverted again, possibly foreshadowing an economic recession.” You may remember that the 3-month Treasury yield rose above the 10-year Treasury yield briefly in March. Usually, longer-term rates exceed short-term rates in a normal economy. But when that relationship breaks down it can signal coming trouble in the economy. Traditionally, inversion happens because the Federal Reserve is raising short-term rates at the same time that longer-term inflation expectations are stagnant or falling. After all, most recessions come about as a result of Fed tightening as the economy slows. And that’s precisely why the Fed quit raising rates this year. Investors will continue to debate the veracity of the yield curve’s signal. Some say it signals impending doom, while others point out that long rates wouldn’t be so low without massive foreign demand for Treasuries. And it is true that with $11 trillion in foreign sovereign debt carrying zero or negative yields, overseas investors have been buying up US Treasuries for their relative attractiveness.
CNBC is bringing out the heavy-hitters this morning to provide some color on the trade war. Famed investor Leon Cooperman acknowledged that if we don’t resolve the trade war, it is negative for the world. But remember, this can all go away with an agreement, or even a positive headline. And his best guess is that we’ll see a 5% stock market correction. But he cautions, “you can’t run money” making decisions on temporal issues like this. Instead, real investors need to invest for the long-term. He expects the US stock market to generate 5-7% returns per year over the long-term. “I think the market is OK.” Mr. Cooperman judges that the stock market is currently at fair value. And he reminds us that bull market cycles don’t end at fair valuation, they end at over-valuation. As for the economy, “we have a slowdown but not a recession.”