Two days ago, when we commented on the early morning plunge in stocks (which was subsequently fully reversed by the close in a historic 800 point Dow reversal), we said that a long-standing question – will Trump pick plunging stocks or trade war – had finally gotten its answer when CNBC’s Eamon Javers said that a “White House official said the the WH recognizes that Trump’s actions are hitting the stock market, but this is “a longer term thing,” and the president has to follow through on a key campaign promise.”
Moments ago, Trump himself confirmed that when in a radio interview on Friday morning, the president said that U.S. markets could face some “pain’’ from the trade standoff with China and other countries, but – like on Wednesday – asserted that in the long-run, Americans would be better off due to his protectionist actions.
Speaking on WABC Radio’s “Bernie & Sid in the Morning’’ program, Trump said “I’m not saying there won’t be a little pain so we might lose a little of it but we’re going to have a much stronger country when we’re finished, and that’s what I’m all about.’
“We have to do things that other people wouldn’t do. So we may take a hit, but you know what, ultimately we’re going to be much stronger for it,’’ Trump said during the radio interview on Friday. “It’s something we had to do, and ultimately if you take a look it’s not only trade with China – it’s everybody.”
To be sure, stocks have fluctuated dramatically in the past few weeks when Trump drastically intensified trade actions and jawboning against several countries, mostly China. Indicating that he is willing to accept some notable losses in the S&P, Trump said in the interview Friday that “the market’s gone up 40% or 42%.” Which suggests that the president would be ok with a drop of 20% or so if it means winning trade war against China.
Meanwhile, as reported earlier, in response to Trump’s latest tariff announcement, China said it would counter U.S. protectionism “to the end, and at any cost,” as a war of words over Trump’s proposed tariffs on Chinese imports escalated.
“The Chinese side will follow suit to the end and at any cost, and will firmly attack, using new comprehensive countermeasures, to firmly defend the interest of the nation and its people,” the Commerce Ministry said in a statement on its website on Friday.
Finally, recall that China yesterday admitted that “squeezing” the US stock market is perhaps its biggest leverage. It now has a green light from the president himself to do just that…
… and between that, and Trump’s admission that stocks are going lower, it may be time to sit on the sidelines for a while.
CRASH! Why stocks could fall nearly 40% over the coming 18 months
The U.S. stock market has seen extreme volatility over the past two months, as investors grapple with the prospect of a trade war, potential regulation for large-capitalization internet companies, and changing monetary policy from the Federal Reserve.
No doubt, many investors are wondering how bad things could get, and how far the market could reasonably fall. According to one analyst, the level where the S&P 500SPX, -2.19% could bottom depends on what kind of selloff Wall Street sees. But in any of three potential paths, more pain can be expected ahead.
Nicholas Colas, co-founder of DataTrek Research, offered three downward scenarios that the equity market could take: a sudden crash, akin to October 1987, where stocks drop sharply over a short period; a “slow motion train wreck” where the time until the bottom is longer but daily losses along the way are shallower; and a “catalyst-driven price reset,” as investors fret that a recession could be on the way, even if one doesn’t materialize.
Colas emphasized that “we are not expecting a U.S. equity market crash or even a snarly bear market,” but admitted, “There’s no sense in denying the obvious—U. S. equity markets feel shaky.”
The first scenario, an abrupt crash, may sound worse than it would end up being, he wrote in a research report. He noted that after 1987’s Black Monday—still the single-largest one-day percentage drop for the Dow Jones Industrial Average DJIA, -2.34%ever—stocks still closed higher for the year, and ended up nearly 10% from the low of that crash.
Colas used Black Monday as a guide, calculating that at the close of trading on that day, the S&P 500 had a forward price-to-earnings ratio of 9.3 while the U.S. 10-year Treasury note TMUBMUSD10Y, -1.97% yielded 8.9%. He added the P/E to the yield, for a total of 18.2, which he said could be used as a proxy for measuring the valuation of the two markets. Currently, the 10-year yields around 2.80%, so to reach the same combined valuation, the S&P’s P/E would have to drop from its current level of about 16 down to 15.4.
In order for the S&P to reach that P/E, the benchmark index would have to fall to 2,187, which Colas dubbed a “1987-style low.” Based on Friday’s close, that hypothetical bottom would represent a drop of 16%, and a drop of nearly 24% from the S&P’s record high, which would be enough to put the S&P into bear-market territory. “Not great, but hardly awful either,” Colas wrote—particularly compared with the other prospects.