Investors entered the week hoping for a repeat of the 1990s. Instead, they might get a rerun of That ’70s Show.
This past week began with the market expecting a quarter-point rate cut from the Federal Reserve and hoping for a sign that more were to come. Fed Chairman Jerome Powell delivered on the first, but called the cut a “midcycle adjustment,” dashing hopes for investors expecting more than one-and-done and causing stocks to tumble on Wednesday.
Of course, the Fed’s rate cuts back in 1995 were also part of a “midcycle adjustment” by former Fed Chairman Alan Greenspan, which helped juice markets for another five years or so. The market seemed to figure that out as the Dow Jones Industrial Average rallied more than 300 points on Thursday before President Donald Trump’s tweets about new tariffs on China hit.
Trump announced 10% tariffs on the $300 billion of Chinese goods, set to begin in September, that have so far avoided them, and it ricocheted through the market. The Dow finished the week down 707.44 points, or 2.6%, at 26,485.01, while the S&P 500 index dropped 3.1% to 2932.05, and the Nasdaq Composite slumped 3.9% to 8004.07. It was the worst drop for the latter two since the week ended on Dec. 21, 2018.
We should have seen this one coming. Trump hadn’t exactly been quiet on the trade front—on Tuesday he tweeted that “the problem with China, they just don’t come through”—and it was simply a matter of time before the issue flared up again. Similarly, it’s simply a matter of time before there’s another “breakthrough” on the trade front for the president to tout.
That doesn’t make us any less worried. Since January 2018, market peaks have coincided with tariff news, notes Deutsche Bank strategist Alan Ruskin. The first tariffs, for instance, were put in place toward the end of that month, precipitating a 10% decline in the S&P 500 after a rip-roaring start to the year.
The S&P recovered but peaked again in September 2018, when Trump placed 10% tariffs on an additional $200 billion in goods, ultimately resulting in a decline of almost 20%. Even the index’s 6.6% drop in May of this year was preceded by Trump raising tariffs on some Chinese goods to 25%.
This past week’s drop could be just the first of many. “Tariff-related risk-off events tend to be multiweek and usually have considerable run in them,” Ruskin writes.
The question is how much of a run. A 6.4% pullback to 2745 in the S&P 500 would be “normal,” says Macro Risk Advisors technical analyst John Kolovos. From there, though, things start to look a lot like they did in the 1970s. Kolovos isn’t referring to macro factors that caused wild swings in the market—there are clearly enormous differences between the runaway inflation of the ’70s and the Fed’s battle to ensure no deflation in the 2010s—but to the market’s gyrations themselves.
In the mid-1960s, the S&P 500 began seeing periods of higher highs and lower lows, ultimately resulting in a massive bear market in 1973-74. Kolovos doesn’t see the same thing happening now, but finds the pattern of higher highs and lower lows worrisome. If they were to continue, it would mean that the S&P 500 would undercut its December low of 2351.10—a drop of at least 22% from this year’s peak.
Is such an outcome set in stone? Hardly. But such trading patters occur in “very emotional market environments of wide bullish and bearish extremes,” Kolovos says.
This could pretty much describe today.
Write to Ben Levisohn at Ben.Levisohn@barrons.com