Investors were greeted on Friday with two nasty surprises. Both occurred in February. Chinese exports dropped by 20.7 percent, while in the U.S., the nation added a dismal 20,000 jobs. As you might expect, the stock market did not take the news well.
What really spooked traders was how far apart these numbers were to expectations. Over here, we were expecting 180,000 jobs to be added to the payroll number. In China, where the economy had been expected to weaken, exports had been forecasted to decline by 6 percent, versus the prior year.
Before the ink had dried on the jobs data, the administration was already sending their point man on the economy, Larry Kudlow, the director of the National Economic Council, on television to assure Wall Street that the February data was "fluky" and should be ignored.
As for China, investors there took the Shanghai Composite down by 4.4 percent overnight. Japan dropped half of that (minus-2 percent), even after the government said its economy grew by 1.9 percent in the fourth quarter of last year. It also didn't help that the European Central Bank lowered its forecasts Thursday for growth in the Eurozone and announced more stimulus measures to support the economy.
Over the last two weeks, I have been warning readers to expect a pullback in the markets, nothing too serious, but maybe a 3-5 percent decline. If I were to take a guess, we could see the S&P 500 Index hit 2,700 or so, before we mellow out. From there, it depends on how low those crazy algo trading machines decide to take us. Where is John Connor when you need him?
By now you should expect these consolidations especially after watching the indices free fall in the last quarter of 2018 and then climb by almost 20 percent from their December lows.
There has also been a growing skepticism over the China/U.S. trade deal. Despite my own skepticism, investors were happy to drink the White House "Kool-Aid" on the timing of a breakthrough announcement. It was first thought the deal would be announced three weeks ago. It was then pushed back after the Chinese team of negotiators returned to Beijing with nothing done. Last week, negotiations were "moving along very nicely," according to the president.
On Thursday, The New York Times reported that negotiators were still trying to lock down details and that Chinese officials "were wary about the final terms" because of Trump's penchant for making last-minute changes over the heads of his negotiators. But, of course, they would say that.
On Friday, Trump, when asked about the deal on the South Lawn, sounded a little less certain. He predicted "a very big spike" in the stock market "as soon as these trade deals are done, if they get done, and we're working with China. We'll see what happens."
Whether we actually do see a spike in the stock market (and for how long) depends on what happens next. Readers might recall that I believed that much of any potential upside for stocks based on a breakthrough trade deal was already discounted by market participants. When announced, it would likely be a "sell on the news" event.
If, on the other hand, the markets continue to pullback here by several percent, and then a really good deal is announced (as opposed to something which simply saves face), then the president might be right. So how do you play it? Simple: do nothing, stay invested, and strap in. The ride should be bumpy.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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