Markets Volatile after Worst April Start Since the Great Depression

Markets Slump on Falling Tech Stocks and Fears of Trade War

After a strong 2017, in which the S&P 500 advanced more than 20%, it appeared as though that momentum would carry into 2018. By late January, the index was up a further 7.5% and in record territory. It’s been a stomach-churning roller coaster since then with the worst April start since the Great Depression. And there’s a lot more downside coming for the stock market thanks to continued weakness with tech stocks, a potential trade war with China, and weak jobs data. Stocks got hammered in early February, with the Dow Jones Industrial Average racking up two 1,000-point daily drops; the S&P 500, meanwhile, lost 8.5% of its value over the first week of the month. Inflation fears and an overvalued market sent investors running for the exits. January inflation (increase in consumer products) was up more than expected. On top of that, investors started to clue into the fact that stock market valuations are in nosebleed territory. The Case Shiller CAPE P/E Ratio was at north of 34.00; the long-term average is around 16. That means stocks were overvalued by more than 113%.¹ After the February swoon, stocks rebounded but remained volatile throughout February and March. At the start of April, it got worse. A stock market sell-off on April 2 saw the S&P 500 plunge below its 200-day moving average; making it the worst start to the second quarter since the Great Depression. One of the stock market sectors hit hardest was technology, thanks in part, to Trump’s disparaging twitter post blaming Amazon for (allegedly) ripping off the U.S. Postal Service.² And the fallout from the Facebook scandal. Markets are also jittery amid fears of a potential all out trade war between the U.S. and China, the world’s two largest economies. Trump hit China with $50 billion in tariffs; hours later, China retaliated, hitting the U.S. with tariffs on $50 billion in U.S. products. Initially, investors thought the threat of a trade war was just more hot air from the White House. But there’s more to Trump’s proposed trade war than just hot air. Undeterred, Trump said in a statement on April 5, “In light of China’s unfair retaliation, I have instructed the USTR to consider whether $100 billion of additional tariffs would be appropriate under section 301 and, if so, to identify the products upon which to impose such tariffs.”³ China’s Commerce Ministry spokesman, Gao Feng, responded by saying, “If the United States announces an additional $100 billion list of tariffs, China has already fully prepared, and will not hesitate to immediately make, a fierce counter strike”. Stocks traded lower again on Friday, April 6 after it was reported the U.S. added a modest 103,000 jobs in March. Wall Street economists were projecting an increase of around 185,000 jobs.⁴ Moreover, the Federal Reserve is still on track to raise rates a total of three times this year. A trade war might complicate the matter, but it still adds fuel to the fire and could result in a lot more headwinds for investors.

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1. “Online Data Robert Shiller,” Yale University, last accessed April 6, 2018; http://www.econ.yale.edu/~shiller/data.htm.
2. “@realDonaldTrump” Twitter.com, April 2, 2018; https://twitter.com/realDonaldTrump/status/980800783313702918
3. Michael, M. and Holland, S. “Trump threatens tariffs on $100 billion more China goods; Beijing ready to strike back,” Reuters, April 5, 2018; https://www.reuters.com/article/us-usa-trade-china/trump-threatens-more-china-tariffs-beijing-ready-to-hit-back-idUSKCN1HD0NW
4. “Employment Situation Summary,” Bureau of Labor Statistics, April 6, 2018; https://www.bls.gov/news.release/empsit.nr0.htm.

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