Opinion |

Yipes! An Ailing Stock Market, With Dr. Trump Attending

The bull run should have died peacefully, but the president’s tax cuts are going to make it a messy end

David Rosenberg
David Rosenberg
Trader Frederick Reimer works on the floor of the New York Stock Exchange as the Dow Jones industrial average fell nearly 500 points, February 6, 2018.
Trader Frederick Reimer works on the floor of the New York Stock Exchange as the Dow Jones industrial average fell nearly 500 points, February 6, 2018.Credit: Richard Drew/AP
David Rosenberg
David Rosenberg

“What goes up must come down” is probably the most overused term during these days of stock market gyrations. After a 9-year bull market, maybe some needed reminding, certainly those under age 30. The New York Times this week ran an advice column “So It’s Your First Market Hiccup. What Should You Do Now?” for panicked young investors.

However, the real issue isn’t whether there is such a thing as gravity in the financial markets, rather, it’s trying to figure out how it operates.

The value of an asset, whether its stocks and bonds, pork belly futures, bitcoin or tulip bulbs can't rise forever. The trick is knowing when the rise is over, how quickly prices will fall – and for how long (after all, the other half of the trick is knowing when to buy it again).

For that, you need to understand why prices are falling to begin with, which isn’t so easy because stock markets fall aren’t coldly calculated. They are not proportional responses to a change to the objective situation. Investors have to guess what any change means. A lot of them don’t have the tools to do that and even those who do don’t have a good track record.

In April 2009, when the U.S. stock market seemed to be bouncing off the lows it had plumbed during the global financial crisis, the celebrity economist Nouriel Roubini assured investors that the only way for the market to go was down. "I'm still cautious and bearish," he said. "I believe we are closer to a bottom in the stock market than a year ago, but this is a bear market rally."

In fact, that rally he was disparaging was the start of a bull market that has remained intact until (perhaps) today.

Then, there’s the lemming phenomenon of everyone selling because everyone else is. That doesn’t have to be out of panic, but fear of being a lonely loser. If you do what the others are doing and it turns out to be wrong, you can at least take comfort in knowing that you’re friends and colleagues are losers, too.

Add to the brew algo-trading by computers programed to buy and sell along predetermined formulas, and a market decline can easily become a free-fall, as apparently happened on Wall Street on Monday.

That explains why the sell-off seems all out of proportion to its proximate cause, which is that on Friday, the U.S. Labor Department reported that wages had risen 2.9% from a year earlier, the best pace since 2009,while the economy added an impressive 200,000 jobs.

So what’s the problem?

The long list of lies

Trump has been holding up the stock market as evidence of his successful economic policies, which deserves a place of honor on the long list of presidential lies. The rally began actually began just a few weeks after Obama took office, and at least he had the sense not to take credit for it.

The real story is that stock markets, America’s in particular, have been climbing with barely any interruption because of the near-zero interest rates imposed by the world’s central banks since the global financial crisis. The low rates gave investors few options apart from bitcoin of places to park their money.

Talk as much as you want about whether the market is overbought or not, or how much corporate profits are rising. This was a supply-side market driven by investors’ need for returns, not a demand-side market based on fundamentals. The prospect of rising interest rates is going to sap demand, if not today then sometime in the not too distant future.

If it’s possible for Trump to regret anything (and that may not be in his skill set), it will be that he enabled the bull to keep on raging long after it should have been put to pasture.

He gave a U.S. economy, which was growing briskly with low inflation and low unemployment, a tax cut it didn’t need. The result isn’t going to be more economic growth in the long term, but the very thing the markets fear: inflation.

The reason market reacted so strongly to the jobs data is because it knows it’s living on borrowed time -- worse still with Dr. Trump attending.

Meanwhile, in Tel Aviv

The Tel Aviv Stock Exchange has reacted with relative equanimity to all this. The TASE’s TA-125 index’s losses have been only half those of the Nasdaq Composite index since the end of last week, and it’s safe to assume that most of the TA-125’s decline has to be the inevitable impact a global sell-off has to have on local investors.

Apart from a low interest-rate environment, the TASE has little in common with Wall Street. The stock market here never experienced a powerful rally even though the economic fundamentals were at least as good as America’s.

Anyhow, for the foreseeable future interest rates aren’t going anywhere – the last thing the Bank of Israel wants is see the shekel grow stronger because rates are climbing. No one thinks the TASE is in a bubble.

What goes up does come down, but how big the impact is depends on how high up you were to begin with.



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