jueves, 20 de junio de 2019

jueves, junio 20, 2019
What Does It Take to Trigger a Stock-Market Selloff, Anyway?

By Ben Levisohn


Photograph by Mandel Ngan/AFP/Getty Images

 
Boy, that escalated quickly.

Investors ended the previous week hopeful for a quick resolution to the trade dispute between the U.S. and China. Those hopes were dashed after China said it would raise tariffs on U.S. goods and President Donald Trump signed an executive order banning telecommunications equipment built by “foreign adversaries.” Further talks between the U.S. and China seem to be off the table for now.

The stock market, however, didn’t seem to mind all that much. Yes, the S&P 500 index dropped 2.5% on Monday, as investors realized that the trade war would not end quietly, but it spent the rest of the week trying to make back its losses. It closed this past week down 0.8%, to 2859.53, while the Dow Jones Industrial Average declined 178.37 points, or 0.7%, to 25,764.00, and the Nasdaq Composite dropped 1.3%, to 7816.28.

The worst of the damage, perhaps unsurprisingly, was sustained by companies with the most overseas business. Goldman Sachs ’ sector-neutral basket of stocks with the most international exposure has dropped 5.5% in May, while a similar basket of domestically focused stocks has declined just 2%. (The S&P 500 has fallen 3% this month.) That’s a sure sign that investors have started paring back their exposure to companies that could be disproportionately affected by an escalating trade war.

That’s also how the situation played out in the fourth quarter of 2018. From Oct. 2 through Oct. 10, the stocks in the S&P 500 with the most overseas pretax income underperformed the ones with the least

That’s also how the situation played out in the fourth quarter of 2018. From Oct. 2 through Oct. 10, the stocks in the S&P 500 with the most overseas pretax income underperformed the ones with the least by about three percentage points. From Oct. 10 through the end of the year, the stocks with the most overseas exposure outperformed slightly as everything else played catch-up, observes Ed Clissold, chief U.S. strategist at Ned Davis Research.

“If the selling widens to other areas, it would be a sign that the pullback is taking on a life of its own,” he writes.

Still, the market drop has been rather muted, considering the risks. That China announced higher tariffs on U.S. goods was predictable—from the beginning, tariffs have been viewed as bargaining chips on the way to a trade deal between the two nations.

The decision to limit Huawei Technologies’ access to U.S. goods and markets, however, is something more, because it has the potential to disrupt China’s plans during a year when the People’s Republic is celebrating its 70th anniversary, says Carmel Wellso, director of research at Janus Henderson. “People don’t understand how important this is to the population of China,” she says. “We’re striking at something more fundamental.”

Some chalk up the market’s calm to investors’ ability to ignore what’s happening overseas. “In our view, the reason markets haven’t budged much on worsening China headlines is because America is happy right now and simply doesn’t get it yet,” explains Richard Farr, chief market strategist at Merion Capital Group.

The fact that the University of Michigan’s consumer sentiment index jumped to a 15-year high in May suggests as much, even if the survey was taken before the latest headlines.

Others suggest that a broader battle between the U.S. and China might not be that bad for stocks, at least in the short term. Higher tariffs will probably mean a slight pickup in inflation, while interest rates will almost certainly stay low. In fact, the futures market is predicting a 75% chance that the Federal Reserve will cut rates in 2019. “Low interest rates typically mean good stock markets,” says Janus Henderson’s Wellso.

But what if something has fundamentally changed in the market? Investors have become accustomed to central banks stepping in to bail out the market, as the Fed did in both February 2016 and this past January, explains Macquarie strategist Viktor Shvets, who notes that damage was quickly undone in both cases “as if by magic.”

There’s no reason to expect that to change, he says, and monetary policy could soon be joined by government spending of epic proportions to keep the economic cycle going. “Investors are complacent because they no longer believe in free markets, and expect any damage from trade wars or politics would be offset by fiscal or monetary tools,” Shvets writes.

The scary part is he might be right.

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