KINGSTON, NY, 1 AUGUST 2018—The business media can't help themselves. Another day, another simple, single reason why stocks rise and fall.
Following double digit losses over the past few days by some tech stocks, such as Facebook, Twitter and Netflix following a series of disappointing earnings reports, the media was selling Dot.com 2.0 market crash fears.
Yes, history has shown that when a handful of overvalued leading stocks in the S&P misrepresent the value of the overall market, there is significant risk of a sharp correction when those stocks sell off. And as we noted previously, markets would be in negative territory if it were not for Amazon and four tech companies' soaring stock prices.
Then on Tuesday, when the Dow initially spiked 150 points, the one-story-a-day hi-tech worries vanished and the new simple, single reason why stocks rose following the 5.4 percent tech drop over the past three sessions was news that the U.S. and China were going to engage in talks to avert the risk of a trade war.
Indeed, we have long forecast that an all-out trade war would not occur. We concluded that Trump's imposed tariffs, and threats of escalating them, were characteristic of his "Art of the Deal" negotiation strategy. And as evidenced by the news of pending negotiations, given its $375 billion merchandise trade surplus with the U.S., China will cut deals rather than destroy lucrative export money stream.
The solid second quarter 4.1 percent Gross Domestic Product increase was, as forecast, in large part a result of President Trump's $1.5 trillion tax cut. And it was Trump's corporate tax cut from 35 to 21 percent that incentivized corporations to, instead of making capital investments, buy back their stocks at a record-setting pace of over $800 billion this year.
These will temporarily boost the economy and markets but they are not sustainable trend lines that will support long-term growth.
TREND FORECAST: Of greater concern are these trend lines:
Aggressive Interest rate hikes. It was record low interest rates that juiced global equity markets since 2009, and it was aggressively rising rates that drove the markets into correction territory in February. Given that markets are overvalued and overleveraged, and that stock buybacks will decrease, we forecast aggressive Fed increases will push equities into correction territory and the GDP will decline to 2 percent or lower.
A strong dollar. As U.S. interest rates rise and the dollar gets stronger, currencies, especially in Emerging Markets, will decline. Thus, the cost burden to EMs to service their $11 trillion sovereign debt, much of it dollar based, significantly increases. Not only have EM currencies dropped 8.8 per cent against the dollar in the second quarter, the MSCI's 24-country EM index, down 17 percent from it year's high, is approaching bear territory.
And with commodities dollar based, economic pressure will increase among nations suffering currency declines.
Spiking oil prices. While oil prices suffered their biggest monthly declines since July 2016, should tensions increase in the Middle East, and oil (dollar based) soar above $100 per barrel, it will deal a devastating blow to equity markets and economies worldwide.