The Finance 202: Saddle up for the midterm stock market slump. It begins now


THE TICKER

Welcome to the midterm stock market. 

Fears of a tech collapse and a budding trade war with China fueled Monday’s rout, which dragged stocks into correction territory. If history is any guide, there’s more of that to come in the months ahead: The six-month stretch that kicked off Monday is the worst-performing period for stocks of any in the four-year presidential cycle, averaging negative returns for investors dating all the way back to 1929. 

That’s according to research by Oppenheimer and Co. analyst Ari Wald: 
 

Investors have plenty of reasons for concern that have nothing to do with the snakebit stretch of the calendar that opened this week with the advent of the second quarter. Most immediately, a batch of bad news from tech companies is jarring confidence in a sector that helped power the market to record highs last year. “Everybody hates Tesla because their production is terrible and their cars crash into stuff. Everybody hates Intel because Apple is moving away from their chips. Nobody likes Facebook because they can’t control their customer data,” says Brian Battle, director of trading at Performance Trust Capital Partners. 

But there’s an unmistakable frisson of anxiety over Washington headlines underlying the new volatility roiling the market.

President Trump’s protectionist volleys are spooking investors wary that a confrontation with China could lead to escalating tariffs that crimp exports while raising costs at home. Consumers would face higher prices and companies would see profits shrink, stalling economic growth. And the president’s Twitter-based attacks on Amazon have prompted shareholders to dump the stock in recent days — a cycle that repeated Monday, as Trump launched a fresh broadside and the online retail giant’s share price slid another 5.2 percent. (Amazon founder and chief executive Jeffrey P. Bezos owns The Washington Post.)

The Trump era’s brand of uncertainty is new; Washington wobbliness brought about by an approaching midterm that drags on stocks is not. In a research note last week, Strategas’s Dan Clifton noted that five of the past six midterms led to a change in control of at least one congressional chamber. “Similarly, elected officials try to retain power with policies which may negatively impact earnings and investors tend to lose faith. In 2014 it was Ebola and border crossings, in 2010 it was Obamacare and Dodd-Frank, in 2006 it was the Iraq War and anti-Bush, in 2002 it was the accounting scandals and Sarbanes-Oxley, and in 1998 it was the impeachment of President Clinton,” Clifton wrote. “This year we have sprinkles of each of the past five midterm elections with tech regulation, trade wars, and even a possible impeachment.”
 

Still, Trump is adding a historically high degree of choppiness to the mix, by at least one measure. According to an “economic policy uncertainty index” — a measure devised by three academic economists that tracks mentions of the words “uncertain” or “uncertainty” in newspaper stories about economic policy — Trump is outstripping his five most recent predecessors, despite inheriting a healthy economy. He racked up a score of 140.2 over his first 13 months in office, compared to then-President Obama’s 126.0 during the same time period but amidst a host of emergency measures to stabilize a collapsing economy, per The Wall Street Journal’s Jon Hilsenrath

“Investors got a taste of Trump era economic policy uncertainty in recent weeks: New U.S. tariffs on steel and aluminum imports and a range of goods imported from China; exemptions from those tariffs dribbled out piecemeal; federal government intervention to stop the proposed acquisition of Qualcomm Inc. by a foreign competitor on national security grounds; and the acquisition of Time Warner Inc. by AT&T Inc. landing in federal court,” Hilsenrath writes. “Complicating matters, it is hard to see a comprehensive policy framework behind Mr. Trump’s interventions into the economy, making it hard to predict what might come next.”

The specter of a trade war with China looms largest. White House trade advisor Peter Navarro, in a Monday afternoon appearance on CNBC, pooh-poohed investor fears about the administration’s new trade hawkishness. “Everybody needs to relax and kind of look the chess board here. This economy is just strong,” he said, adding “the smart money is certainly going to buy on the dips here because the economy is as strong as an ox.”

But manufacturers are already reporting price shocks from the administration’s plan to impose tariffs on imported steel and aluminum. “The tariff announcement helped send a measure of raw-material prices paid to an almost seven-year high in March, the Institute for Supply Management’s manufacturing survey showed Monday,” Bloomberg’s Sho Chandra reports. “Steel and aluminum are raw materials used across the industry, and businesses began stocking up in response to the tariff announcement… Some companies were told that price quotes for steel would be valid for just 24 hours, while others found that the material was gone or were quoted a higher price when they called back a day or two later.”

And China on Sunday rolled out its response to the metal tariffs, announcing plans to impose $3 billion worth tariffs of its own on imports of 128 American products, as high as 25 percent on pork and 15 percent on some fruit. China watchers say Beijing intended the announcement as a warning shot that it will continue to respond in kind to new tariffs; the Trump administration has proposed $60 billion in additional levies in retaliation for alleged Chinese theft of U.S. intellectual property. 

“On the new round of tariffs, the U.S. will first take comment from industry for 30 days and then have 180 days to decide whether to actually levy tariffs,” The Journal’s Joshua Zumbrun, Jacob Bunge and Jesse Newman write. “That gives plenty of time for talks—although the negotiations will they will be conducted under the threat of U.S. retaliation. U.S. officials expect the Chinese to match their threats tit-for-tat, further ramping up the pressure.”

The Chinese understand that the “more they retaliate, the more it hurts them, as well,” but feel the need to match every U.S. penalty in order to save face, says Trey McArver, co-founder of the research firm Trivium China. What’s more, he adds, the Chinese leadership think “they have a higher tolerance for pain than the U.S. does, because of their political system.”

Continued escalation of the trade war will assure this year’s midterm slump on Wall Street arrives ahead of schedule. In past years, the ugliness typically begins in May, as this Oppenheimer chart shows: 

The good news for investors, per Strategas’s Clifton: “Historically, midterm election sell-offs tend to be great buying opportunities with stocks up one year later every single time since 1962 and by an average of 36 percent. The S&P 500 has not declined in the 12 months following a midterm election year since 1946.” See the post-midterm bounce here: 
 

MARKET MOVERS

Stocks blow past red flags. Bloomberg’s Luke Kawa: “Risk assets are under siege, pushing everything from Chinese stocks to copper to cryptocurrencies to the verge of their last technical line of defense — and beyond. The S&P 500 Index shot through its 200-day moving average Monday, a line of support it held in February and March. The gauge is now down more than 10 percent from its January record… But that’s far from the only place where technicians are preparing to gaze into the abyss. A pair of U.S. tech titans are trading in technically precarious ranges: Apple Inc.’s about 2 percent above its 200-day moving average, while Alphabet Inc. is trading right on top of this support line.” Monday marked the worst start to April since 1929.

“The stock market is still up more than 20 percent since Nov. 8, 2016, the day Mr. Trump won the White House — a roller-coaster ride driven in part by expectations about what a Trump presidency could bring to Washington,” NYT’s Matt Phillips writes. “When the S.&P. 500 notched its high-water mark of 2872.87 on Jan. 26, it represented a roughly 325 percent increase since the bull market began in March 2009. But since February, a toxic stew of factors — many but certainly not all of them emanating from Washington — has polluted what had been the market’s placidly rising waters. And there’s little prospect of the messes dissipating anytime soon.”

From CNBC’s Carl Quintanilla:

From CNBC’s John Harwood:

From Axios’s Dan Primack:

The best hope for bulls. Bloomberg’s Elena Popina: “This too shall pass. At least that’s the mantra shaken bulls are repeating after renewed selling in once high-flying technology shares and angst over a trade war sent the S&P 500 tumbling to the lowest level since early February. They point to the cornerstone of the nine-year bull market as the reason for confidence: rising corporate earnings. In fact, amid the recent turmoil, analysts have grown more confident that economic strength will show up on the bottom line. They now anticipate first-quarter profit growth of 17 percent, up from 13 percent at the start of January… While investors have pulled money from tech shares, analysts expect the sector to carry the earnings load… Banks should pick up the baton as the year wears on.”

Corporate buybacks on hold. Bloomberg: “The stock market’s missing a key participant as the second quarter kicks off with a rout. Corporate America is stuck on the sidelines as the S&P 500 Index plunges to its lowest level since early February. That’s to comply with regulations under which companies refrain from discretionary stock buybacks for about five weeks before reporting earnings through the 48 hours that follow. So, with first-quarter reporting season kicking into high gear in two weeks, companies must sit on their hands while the market fizzles.”

Mohamed El-Erian, the chief economic adviser to Allianz, calls it healthy. “As they enter the second quarter, policymakers and financial market participants would be well advised to think of the first three months of 2018 not as a temporary and reversible aberration but, instead, as an ongoing transition to more normal conditions,” he writes in the FT. “Larger two-way price movements in asset prices were long in coming but inevitable, especially after the unusual calm of 2017. They occurred in the context of a relatively strong global economy, continued progress in the orderly normalisation of US monetary policy and reawakened sensitivities to political risk. Discounting certain risks, they could end up part of a healthy resetting of markets that places them on a firmer medium-term footing.”

— Spotify’s big day. Bloomberg’s Alex Barinka: “Spotify has avoided the traditional route to becoming a public market company at every stage. Listing day is going to be no different. A successful trading debut for the music-streaming company won’t be judged on whether the shares jump 30 percent — the usual benchmark for a triumphant initial public offering. Instead, Spotify Technology SA and its advisers would prefer a less exciting outcome, according to people familiar with the matter. For Spotify, a favorable first day won’t be defined by how much the share price climbs from the open to the close, said the people, who asked not to be identified because the matter is private. Instead, its goal is to have the stock look like it would on a run-of-the-mill day — with shares trading efficiently with little volatility as soon as possible.”

TRUMP TRACKER

Trump’s war on Amazon. Vanity Fair’s Gabriel Sherman: “Trump is discussing ways to escalate his Twitter attacks on Amazon to further damage the company. ‘He’s off the hook on this. It’s war,’ one source told me. ‘He gets obsessed with something, and now he’s obsessed with Bezos,’ said another source. ‘Trump is like, how can I [expletive] with him?’ According to sources, Trump wants the Post Office to increase Amazon’s shipping costs. When Trump previously discussed the idea inside the White Hose, Gary Cohn had explained that Amazon is a benefit to the Postal Service, which has seen mail volume plummet in the age of e-mail. ‘Trump doesn’t have Gary Cohn breathing down his neck saying you can’t do the Post Office [expletive],’ a Republican close to the White House said. ‘He really wants the Post Office deal renegotiated. He thinks Amazon’s getting a huge [expletive] deal on shipping.’

“Advisers are also encouraging Trump to cancel Amazon’s pending multi-billion contract with the Pentagon to provide cloud computing services, sources say. Another line of attack would be to encourage attorneys general in red states to open investigations into Amazon’s business practices. Sources say Trump is open to the ideas… Even Trump’s allies acknowledge that much of what’s fueling Trump’s rage toward Amazon is that… Bezos owns [The Post]… While the Post says that Bezos has no involvement in newsroom decisions, Trump has told advisers he believes Bezos uses the paper as a political weapon.”

Baron responds. NYT’s Sydney Embler: “Amazon does not own [The Post] … Trump, however — impervious to certain facts and armed with a Twitter account — has tried hard to convince the public otherwise… How do the president’s broadsides play inside The Post’s newsroom? ‘I don’t even know how to describe what goes through my mind,’ Martin Baron, the paper’s executive editor, said in a telephone interview on Monday. ‘It’s completely made up.’ … Mr. Baron also rebuffed any suggestion that The Post was a lobbyist for Amazon, as Mr. Trump has proclaimed at times. ‘There isn’t anybody here who is paid by Amazon,’ he said. ‘Not one penny.'”…

“Mr. Bezos holds conference calls with The Post’s leadership every other week to discuss the paper’s business strategy but has no involvement in its news coverage, Mr. Baron said. During his occasional appearances at The Post’s building, Mr. Bezos sometimes stops by a news meeting ‘just to thank everybody,’ Mr. Baron said. ‘I can’t say more emphatically he’s never suggested a story to anybody here, he’s never critiqued a story, he’s never suppressed a story.'”

Trump eager for NAFTA deal. Bloomberg’s Eric Martin: “The Trump administration is pushing for a preliminary Nafta deal to announce at a summit in Peru next week, and will host cabinet ministers in Washington to try to achieve a breakthrough, according to three people familiar with the talks. The White House wants leaders from Canada and Mexico to join in unveiling the broad outlines of an updated pact at the Summit of the Americas that begins April 13, while technical talks to hammer out the finer details and legal text could continue, according to the people… The three nations face a challenge to meet the U.S.’s goal because major divisions remain, including on the U.S. proposal for more North American content in automobiles.”

Muzinich for Treasury No. 2. NYT’s Alan Rappeport: “Trump on Monday will tap Justin Muzinich, a top aide to Treasury Secretary Steven Mnuchin, as the Treasury Department’s deputy secretary, a powerful role that includes overseeing a broad portfolio of policy matters like taxes, financial regulation, trade and economic sanctions. The nomination fills a void in the top ranks of the department, which has operated without a full-time deputy secretary since Mr. Mnuchin was confirmed more than a year ago. Mr. Trump’s previous picks, the longtime Goldman Sachs executive James Donovan, and Brian Brooks, a Fannie Mae executive who was not formally nominated, withdrew their names from contention last year. Mr. Mnuchin later said that he was not going to fill the position.

“The ascendance of Mr. Muzinich comes as Mr. Trump reshuffles his economic team, most notably replacing Gary D. Cohn with Larry Kudlow as the director of the National Economic Council. Far from a flamethrower, Mr. Muzinich, who spent most of his career on Wall Street, will add a more moderate voice with traditional conservative economic ideas to the table.”

MONEY ON THE HILL

Cuomo tries a tax shield. The Post’s Jeff Stein: “New York Gov. Andrew M. Cuomo (D) has pushed through a plan to shield his state residents from tax hikes under the Republican tax law — and Democratic-controlled statehouses across the country are following suit. On Saturday, New York became the first state to approve new tax measures designed to shield residents from tax hikes under the GOP bill… The two provisions — one creating a new ‘charitable’ fund to replace local property taxes, and the second a largely technical change in how taxes are assessed — aim to help taxpayers avoid a new $10,000 cap on the amount of state and local taxes they can deduct from their federal taxes. The cap was imposed by congressional Republicans to raise money to offset their law’s steep cut to the corporate tax rate, but critics say it was designed to hurt residents of liberal states… Both provisions passed as part of New York’s budget, but they face significant hurdles. If successful, they could provide a template for Democratic-controlled statehouses around the country where lawmakers have vowed to protect their voters from tax increases under the law.”

Puerto Rico’s governor on Monday fiercely defended his administration’s right to help steer the insolvent, storm-ravaged island out of bankruptcy after a U.S. congressman said the process should be led by the island’s creditors and federally appointed oversight board.

Reuters

POCKET CHANGE

DOJ cites Time Warner’s muscle. Reuters’s Diane Bartz: “The Justice Department, seeking to stop AT&T Inc’s deal to purchase Time Warner Inc, sought on Monday to show how often Time Warner subsidiary Turner would threaten to cut off cable companies to win concessions during contract negotiations. The Justice Department has asked Judge Richard Leon, who is hearing the testimony, to order the companies to abandon the $85 billion deal on the grounds that it is illegal under antitrust law. Coleman Breland, who negotiated distribution contracts for Turner for more than two decades, testified about a series of instances in which the movie and TV show maker threatened to ‘go dark,’ essentially cutting off access to content for various cable providers… By threatening to go dark, Time Warner was able to get higher rates, convince pay TV companies to take more channels and make sure those channels were offered on a ‘basic’ tier rather than an optional one, Breland acknowledged under questioning.”

An analysis by The Wall Street Journal found that private markets have more than doubled in size over the past decade, surpassing the growth of public stocks and bonds available to all investors. That’s transforming how companies grow, concentrating investing in fewer hands and raising concerns on oversight.

WSJ

THE REGULATORS

Mulvaney calls for weaker CFPB. NYT’s Alan Rappeport: “In his first report to Congress as the acting director of the Consumer Financial Protection Bureau, Mick Mulvaney called on lawmakers on Monday to cripple the agency that he has been temporarily tasked with overseeing. Mr. Mulvaney, a longtime and unapologetic critic of the financial crisis-era bureau, has spent the last several months freezing its enforcement activities, dropping cases on payday lenders and shutting out career staff from major decisions. He has called for the bureau to be more ‘humble’ and less aggressive in its efforts to protect consumers and to consider the impact on businesses when making decisions…

“Mr. Mulvaney made a series of recommendations to lawmakers that would curb the bureau’s power and independence. He called for it to be funded through congressional appropriations, rather than through the Federal Reserve, which has insulated it from political jockeying. He also recommended that bureau rules be subject to legislative approval and advised that the president should have direct oversight and authority over the bureau’s director. Right now, the director can be removed by the president only for specific and justifiable cause, rather than for political or other reasons.”

Treasury weighs releasing more market data. WSJ’s Andrew Ackerman and Daniel Kruger: “U.S. policy makers are meeting with banks and trading firms about whether to release to the public data on the $14 trillion U.S. Treasury market that the government has been collecting since last summer… The debate over making the data public divides the financial-services industry. In general, big banks favor keeping the data for regulators’ use only, while high-speed traders and hedge funds support making it public. Treasury is expected to meet this week with New York-based trading firms followed by another set of meetings next week in Chicago, two people familiar with the meetings said. They have already met with each of the 23 primary dealers that participate in U.S. government bond auctions overseen by the Federal Reserve, a third person said.”

CHART TOPPER

“The richest Americans get a $33,000 tax break under the GOP tax law. The poorest get $40.,” writes The Post’s Jeff Stein: 

DAYBOOK

Today

  • The Center for Strategic and International Studies holds an event on blended finance and global development.

Coming Up

  • The Heritage Foundation holds an event on overspending and debt on Wednesday.
  • The Peterson Institute for International Economics hosts its semi-annual Global Economic Prospects session on Wednesday.
  • The CFTC and the Center for Risk Management Education and Research at Kansas State University host a conference on agricultural markets on Thursday and Friday

THE FUNNIES

From The Post’s Tom Toles: 

BULL SESSION

China slaps tariffs on U.S. goods:

The Post’s David Nakamura examines President Trump’s latest comments on DACA: 

Rep. Elizabeth Esty (D-Conn.) said 2 she won’t seek reelection after she took months to remove top aide accused of threatening to kill a colleague:



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