Evidence of Intramarket Negatives Shows U.S. Indices Have Further to Fall

U.S. Indices

Things don’t look great on American index charts today – the S&P 500 fell a few points this morning, and the Dow looks like it experienced losses of around 1%.

To those who would say it still looks like these baskets of U.S. stock valuations are up near historic highs, there are some key things investors are worrying about that are clouding the horizon.

Perhaps the largest one is the disturbing vision of an America on the world stage, arms out, with its sleeves rolled up, hands clenched into fists, and vowing to take on all comers.

As the country engages in a major trade war with the world’s other biggest superpower, China, and generates further trade conflagration with its neighbor to the south, Mexico, there’s also news that the U.S. is imposing further sanctions on Iran, a major power in the Middle East.

It doesn’t take a lot of geopolitical prowess to note that the American machine may be spreading itself very, very thin.

Interest rates are already near zero, after decisive Fed action in the wake of the 2008 financial crisis, and now investors are clamoring for rate cuts. News this week shows they may not get them – and that’s flatlining markets, too.

There simply isn’t a lot of runway in the American economy, to put it lightly, and that’s one thing you’re seeing depressing the markets today. We can expect that these pressures are going to continue to occur, especially as the actual market consequences of tariffs make their way into consumer pricing.

Major retailers like Walmart and Costco have already gone cap in hand to beseech the president not to embark on a spate of protectionism that could shutter small businesses around the country and crash world markets.

Then you have FedEx today suing the federal government over trade protectionism prior to an expected earnings report later this week.

None of it really sounds good to investors, and even on days when U.S. markets are rallying, there’s an ominous drumbeat in the background.

Part of that tension is driven by the evident reality that news in one economic sector tends to influence news in another.

“Homeowners looking to sell may have reason to grow increasingly concerned about President Trump’s deteriorating relationship with China,” wrote Jack Passy at Marketwatch about a month ago, looking at protectionism and the damage that it can produce. Millions of Americans could be looking to sell their homes in the next year. But will the ongoing trade war between the United States and China get in their way?

“Consumer confidence appears to be weaker than recognized, particularly with respect to large ticket purchases like housing or remodeling,” said Rob Dietz, chief economist at the National Association of Home Builders, as quoted by Passy. “Clearly, a trade war increases this uncertainty,” he said. “We estimate that the 25% rate on the existing set of tariffs represent a $2.5 billion annual tax increase for the housing sector in terms of materials used for construction. A trade war will also hurt sectors of the economy, like agriculture, and increase overall consumer wariness.”

It’s no secret to those who understand markets that the eventual result of the new tariff activity is going to be resoundingly negative. But other presences before the national media’s cameras seek to assure consumers that they have nothing to worry about. Don’t be in that camp. Act to hedge against downward numbers in a wide spectrum of U.S. markets.