Is Trump Responding to the Dow – and Would He Prioritize Index Over Dollar?
This past week generated another heavy round of criticism from the US President. In both ad hoc press conferences and tweets, Donald Trump scrutinized a number of economic and financial hurdles that he believes is threatening the health of the US economy. The most familiar critique continued to target the Federal Reserve and specifically its Chairman, Jerome Powell. Trump took to the wires to levy blame against the monetary policy authority essentially every day. His specific accusations were of a familiar flavor, but they boil down to an essential accusation that the independent setter of interest rates was keeping the Fed Funds baseline higher than it should be which is choking off growth. His specific targeting, however, shows some internal conflict over his interests and the paradox for which his own demands would not be met even by a fully compliant central bank. The most frequent issue the President has taken with Fed policy has been the level of the US Dollar – which notably closed this past week at a more-than two-year high, or EURUSD two-year low. An accusation that other authorities are manipulating their own currency (the ECB with the Euro and PBOC with the Yuan) isn’t his chief concern, but rather that the Fed isn’t responding in kind.
From his remarks, it seems he is less concerned over the economic pain a stronger currency may bring, but rather that the transmission of the trade war efforts employed by the Administration are watered down by the exchange rate adjustment. Therein lies one conundrum as an effective policy push by Washington would lead to a weaker global counterpart and thereby weaker currency. Therefore, some extra-ordinary effort needs to be employed to keep the currency steady or to force it to depreciate alongside the transmission of the pressure – hence the badgering Powell. Conversely, when the stock market begins to sag, the focus from the White House shifts to the level of the Dow or S&P 500, though the stated interest remains the same in a reflection of strong growth. It should be said, the economy is not necessarily the market. As the market slips and recession signals multiply, there is an effort to identify the source. Relatively little attention is paid to the age of the maturity of the economic and financial cycle alongside the disparity of expansion and unrealistic investor expectations as there is a collective obsession for singular catalysts (a function of crowd psychology).
There has been a growing din of criticism around the negative impact of the trade war tariffs in economist assessments, business sentiment surveys, earnings reports and more. The President has stated clearly though that he will not let up on the pressure mounted against China. With the blame building, Trump has instead started to redirect towards American businesses. This past week, he blamed auto manufacturer GM for not moving the operations it has in China back to the US. That same day, he also stated that companies that warned earnings could be negatively impacted by the trade wars were “weak” or “badly managed”. This does not exactly warm investor enthusiasm over the health of the markets. So, will the President continue to push for a lower Dollar and shame US businesses into amplifying the effort to transmit the tariffs or let up on the economic conflict to keep the markets buoyant? You can’t have both and eventually bouncing between the two objectives will seem conditions fracture.
The Bank of Canada and Reserve Bank of Australia Kick off a Season of Critical Monetary Policy Decisions
September is a month for which nearly every one of the major central banks are due to weigh on their local monetary policy; and this year, we happen to find this ‘external’ influence on economy and market performance at a particularly critical junction. Markets are buoyant – some like the US indices are much higher than others, but they are broadly trading well beyond value – and the underlying strength of the global economy has clearly eroded. This has put increased pressure on the world’s monetary policy authorities to compensate for where the markets lack in traditional form. Unfortunately, rates are already extremely low and there is already an enormous amount of stimulus (over $20 trillion from just 6 central banks alone) sloshing around the system. What more could these groups reasonably do? What would we as market participants assume policy efforts that have already earned limited economic performance and has more recently struggled to offer capital market lift can do through further iterations of the same? I am skeptical that there is the same delusion that has translated into convenient complacency that we’ve seen in previous years standing in wait to provide further lift through the foreseeable future.
The limited capacity of the Fed, ECB and others is no longer an academic conversation but rather Main Street fare. We are due some critical rate decisions later in the month – the ECB on the 12th expected to introduce an open-ended QE, the Fed on the 18th is targeted with a demand for another cut, then a combo of BOJ, BOE and SNB is on the 19th – but we have a few decisions we should watch this week as well. The Bank of Canada (BOC) is currently the most hawkish major central bank, not for its current level but rather its reticence to commit to a dovish course. If this group capitulates, it can be a big Canadian Dollar charge, but it could also nudge views of global monetary policy. As for the Reserve Bank of Australia (RBA), the group is already into easing mode and generally contemplating unorthodox policy. This is significant on a global basis because the Australian Dollar’s position amongst the majors is in large part a function of its yield – it is a carry trade. As that trait falters, the systemic view of returns and value are further distorted.
Seasonality Takes an Extreme Swing in September Through the S&P 500 and VIX
With Friday’s close, we have brought to an end the week, month and season all at once. This period traditionally marks a serious transition of market conditions that usually moves from quiet listlessness and beneficial complacency into a period of significant activity and substantially higher risk of capital market losses. Historically, the month of August is the most reserved period of the calendar year according to the performance of the S&P 500 over the last four decades (see the attached image). While the index averages out a moderate level of gains for the month, what is truly remarkable is the volume behind the market. When adjusted by active trading days, August registers less trading than February or December (which have fewer total days). When we look to the reasoning behind such restraint, there is a certain level of self-fulfilling prophecy to the receding tide. Investors expect that quiet will dictate the decisions of other investors so they themselves accordingly with smaller adjustments to position that leave the systemic and long-term balance to another time. What is interesting is that the month of August is actually quite active when referencing the VIX volatility index. That mix of restraint in progress but rising volatility was actually in clear display this past month as the S&P 500 spent much of the period bouncing rapidly back and forth in a restrictive span. That sets the stage for September.
With the US Labor Day holiday, we transition from the full ‘Summer lull’ to the active Fall trading season. Volume picks up, but volatility hits new highs through the month – peaking between September and October. Notably, this activity starts to register more progress in price action. Referencing back to the seasonal measures, the S&P 500 has averaged only one month of losses back to 1980 and that is during the month of September. This likely has as much to do with the markets living up to its fears as any repeatable development timed specifically during this part of the year, but it occurs with statistical relevance nonetheless. What’s more, the market has plenty to worry over at this juncture between the fears of recession, the persistence of trade wars, wavering confidence in the leveraged dependency on central banks and more. Often times, investors are simply waiting for a collective reason to de-risk from exposure they already consider excessive, and this gives a familiar anchor into the mass psyche.