In our last blog, we thought the 50-day moving averages of the three indices may provide temporary support. But on Monday, August 5th, all three indices plunged to violate the 50-day moving averages with heavy volume. The heavy selloff has changed the characteristics of the bull market that started from the December 2018 low.
The market was surprised to find out that 10% tariffs on the additional $300 billion Chinese imports will take place on September 1st. The trade war risk was always there, but the market chose to gloss over the risk and chased the technical price momentum. The trade war started as fixing trade deficit with China, now it has morphed into a currency war. A currency war has far more reaching impact than a trade war because it will endanger the global financial system. The reason why the market has down played the trade war risk is the belief that Trump needs to have a trade deal in order to be re-elected. With the escalating trade war, the market will not rally even with lower rates.
From Trump’s words and behavior, right now it appears that Trump may not care if he gets a trade deal or not before the re-election. We do believe that if the market crashes 10% from here, Trump will care and that’s when a trade deal will be made, whether is good or bad. So the market is the only one that can discipline a reckless president.
The FAANG stocks have not taken out their respective all time high since the December 2018 low was made. It is very interesting to see the old leaders are not leading at this juncture. Perhaps it is sending a message about the next bull market. Many of the biggest ideas in technology over the past decade have centered on how people communicate, consume, transact and travel. Over the next decade, however, the most profound innovations—and investment opportunities—could be on factory floors, in operating rooms, at mining sites and energy facilities.
