Markets Crumbling Under Trade War

Stock markets around the globe are under considerable pressure during today’s trading session, August 5, as onlookers no longer have faith that the White House and China officials are being truthful about the progress of trade talks. We think credibility is severely damaged, and China letting the yuan decline against the US dollar suggests the country may go to just about any lengths to defend itself against US economic sanctions through hefty tariffs. 

Last week, the Fed dropped the federal funds rate a quarter point, and while the US economy continues to chug along nicely, we maintain our view that much of the strength is artificial, built on what is now a decade of accommodating Fed policy and quantitative easing. Despite the market being just a few percentage points from all-time highs, many are now betting on three to four more quarter-point cuts by the end of this year. There’s an 80% probability of a quarter-point cut in September, according to CME Group’s FedWatch Tool.

The duration of this bull market is getting long in the tooth, and the proliferation of quantitative and index investors do not make the market structure safer, but much more hazardous for retirees. We talked about the broader economy in our Economic Roundtable, and while we generally agree that the Fed should be looking to manage the yield curve to prevent the behavioral implications of a recession, that we’re even talking about the Fed cutting rates amid such US economic strength means we could be gearing up for something awful.

Image Shown: The performance of the S&P 500 (SPY) since the middle of 2017.

In December 2018, we moved the newsletter portfolios to be “fully invested,” practically at the near-term bottom, calling for a melt-up at the time; today, we’re strongly considering de-risking the newsletter portfolios in anticipation of what may be a swift move to the downside that may eventually test those December 2018 lows again. We think the biggest risks of the market are coming to a head: US-China trade relations, inverted yield curve and Fed cautiousness, political uncertainty regarding a roll-back of corporate tax cuts if there is a Democratic 2020 victory, and market structure (price-agnostic trading). We expect volatility to rear its ugly head again.

Just a few things in case you missed them. You can read through our updated oil and gas pipeline (MLP) reports here and my most recent interview here. We talk about General Motors (GM) here, and we talk about Quad/Graphics (QUAD) here. Please note that we released both the August editions of the Dividend Growth Newsletter (download pdf) and High Yield Dividend Newsletter on the 1st (inquire), and the August edition of the Exclusive publication on August 3. If you haven’t already, don’t forget to lock in the Exclusive pricing here. It will go up end of day today. The Exclusive publication is limited to 1,000 members.

In other news over the weekend, Best Ideas Newsletter portfolio holding Berkshire Hathaway (BRK.B) reported what best can be described as a ho-hum report, with second-quarter operating earnings falling from the year-ago period due to weakness in its insurance businesses. Many, however, were talking more about concerns over the company’s large cash balance of ~$120 billion at the end of the quarter as a indication that the market is overpriced. We like Buffett’s cautiousness, and we definitely like that he’s not buying back Berkshire shares hand over fist. There’s a reason why Uncle Warren was there to bail out quant hedge fund LTCM in the late 1990s and the big banks last decade, and that’s because he focuses on price-versus-value. Right now, stocks are far from a “screaming buy,” as some may say.

That’s all for today. Stocks have started another leg down, and we’ll alert you to any changes in the newsletter portfolios as they happen. Thank you! Read more about the Exclusive >>