And today’s investing lesson comes, per the usual, from the Oval Office.
The Dow Jones Industrial Average plunged more than 400 points on Tuesday as the record-setting market moved quickly to digest a flare up in President Trump’s trade rhetoric. Indeed Trump pulled the trigger two times on his good old trade war branded flamethrower (which he has used at various points this year to unsettle often over-optimistic markets) as he waved it atop the heads of uber bullish investors.
For starters, Trump perhaps ignited a new risk in the market in the form of a trade war with the European Union. The administration said Monday it may slap 100% tariffs on French imports such as wine and cheese if the country hits U.S. tech companies with a new digital tax. Meanwhile, at a press conference in London, Trump said he is in no rush to do a trade deal of any kind with China — hinting in fact he may wait until after the 2020 election.
“In some ways I think it's better to wait for after the election, if you want to know the truth,” Trump said.
Obviously a market that has gone up in a straight line this past three months on hopes of a “phase one” trade deal with China didn’t take too kindly to Trump comments. They set the stage for higher U.S. tariffs on China goods to go into effect as planned on Dec. 15.
Nowhere is this priced into the market, despite what market pundits pontificate.
In the process of all this renewed trade hoopla, investors should be reminded of a valuable lesson. That is do not get complacent. Yes, it’s great when stocks seemingly rise everyday and the news appears to be endlessly positive. But with that comes a growing expectation in the market that very little could go wrong. And when it does go wrong, it’s seen as a surprise that has to get priced into equities.
Clearly investors have forgotten this timeless lesson of late.
The CBOE Volatility Index (VIX) — Wall Street’s fear gauge known as the VIX — recently closed below 12 for the first time in over a year. What that basically means is that investors didn’t see the return of stock market volatility anytime soon. Rather, they only saw the slow market melt-up that has driven stock prices since the fall.
The VIX dipping below 12 could mean the start of a short-term pullback in the S&P 500 as investors reassess trade war risk. According to Sundial Capital Research, the S&P 500 has fallen about 0.2% over the next week and two weeks after a VIX close below 12.
Or, the selloff could be worse if recent past is any guide.
“The last two times these threats hit the news tape (in May and August), it created a multi-week decline that took the S&P 500 down more than 6%,” Miller Tabak strategist Matt Maley says. “The question now is whether investors will think that this is the situation where the boy is crying wolf and thus they’ll ignore the President…or they’ll worry that the threats on three different areas of the globe are something to causes them to take some profits before the end of the year.”
Looking for an upside to this current predicament? It could be the long-awaited healthy dip in stocks that would justify buying back into the bull market, points out Fross & Fross Wealth management co-founder Thomas Fross.