The bullish hangover continues. We are still very much trying to work off the euphoria that greeted us in the new year and I think it is going to take more than a few days of this kind of negative action before we are a place where the firmament seems, well, firm.
What's going on to make it so almost the entire market's getting rocked after a nice comeback from the depths of the February lows.
Let's count down the reasons.
First, as we all know by now, Gary Cohn, chief economic adviser to the president, is departing the White House. That alone is enough to send the market into a tizzy because investors felt safe with a man who used to be number two at Goldman Sachs.
More important, though, for the sellers, it's presumed that he will be replaced by far more radical economic elements. Let me play with an open hand. I believe that we need to be tougher with our trading partners because some of them, particularly the Chinese, have targeted industries that require a lot of workers so they can put their own people to work.
We have whole industries that are in danger of being decimated or already have been. The president has decided to draw the line on steel and aluminum slapping across the board tariffs of 25 percent on imported steel and ten percent on aluminum.
I do not fear these policies because I think some of them are needed. We used to dominate the aluminum industry 18 years ago. Now the Chinese make 55% of the world's aluminum and we make almost none. Were we a high cost producer? Sure in some places. But not in all of them. The Chinese government though subsidizes both aluminum and, more important, steel, and we can't compete no matter what. Even the best of the best, Nucor (NUE) , struggles with import dumping, and it has terrific management, a fabulous workforce and the latest in technology.
So we end up sacrificing our own people and perhaps even cripple vital industries that we can't afford to lose especially for defense purposes. Look, this is a calculus. We want to stimulate good jobs in this country, but we don't want to stimulate a trade war that can be ruinous. Cohn clearly didn't think it was worth the risk. The new team, however disagrees. I don't think either view has a monopoly on being right. I do think, though, that the president is correct to try to stop the Chinese from taking our high paying blue collar jobs in order to put their people to work to avoid a revolution, even if it means we do less business in China for now. I say for now because I think that China is more of a paper tiger than many people believe and they will move away from wrecking our steel and aluminum industries to keep our markets open. So, no, I am not panicked on Cohn's departure. It was right that we sold off on his exit. But there is a difference between a selloff and a panic.
A related second is that it doesn't sound like the president is stopping at steel and aluminum. Last year when President Trump excoriated car makers who built cars in Mexico and then sold them in the U.S. Ford (F) capitulated and decided not to build a huge plant there. But Mercedes and BMW thumbed their noses at the president and each decided to build gigantic plants in Mexico. The president is upset with the advantages that NAFTA gives companies who make goods in Mexico and these two automakers are coming in for some heat. You go after autos, especially German autos, you know that you are in for a worldwide trade war if you aren't careful. The president went down this path before and got more jobs here. I think that if he pushes and pushes again, our trading partners will give in or give our country a promise to create more jobs here. It is all about jobs with the president and he's the negotiator in chief. He's willing to take risks most won't to get his -- and the nation's -- way
Third, there's tremendous fear that tomorrow's non-farm payroll report will be similar to the previous month's report, which triggered an incredibly rapid decline in the stock market. When the market fell today it didn't seem worth it for many to bargain hunt, knowing that we could be in for a second dose of pain. I agree with this. We have a ton of cash for my charitable trust, yet we still told members of the actionalertsplus.com club that we preferred to wait for deeper bargains and are willing to miss the upside that might be triggered by a softer number.
One of the reasons why I felt that way is reason number four for the selloff: a pervasive view among some retailers that it's getting more expensive to do business because of tighter labor markets. Among the variegated reasons for the horrendous decline in the stock of Dollar Tree (DLTR) is a step up in labor expense. If you are an investor, you don't like that kind of expense. We never want to see inflation even when it comes with the growth territory. That said, holy cow, that kind of decline on what was a not all that bad a quarter, did take your breath away. It helped bring down a host of other retailers that already had been hit like Target (TGT) but also TJX (TJX) which we profiled last night as a winner. I don't like to see retail go down because of what it says about the American consumer. Ross Stores (ROST) gave you a great quarter but weaker guidance and it got blasted out of the water. Not a good sign, either.
Fifth, the wrong stocks are going up. The universe of winners has gotten incredibly small. You can count them on one hand and two fingers: Workday (WDAY) , Saleaforce.com (CRM) , Redhat (RHT) , Square (SQ) , Splunk (SPLK) , Adobe (ADBE) and a couple of semiconductor related companies like Lam Research (LRCX) devoted to big data seem to be the only reliable winners. We know that any time we get a real narrow market you end up with too many losers and not enough winners and people ultimately flee the market. The propensity of a small number of winners that keep winning in this market does make people nervous and ponder that it's only a matter of time before they, too, give up the ghost offering nothing that's safe to own. I actually felt good that Netflix (NFLX) , up 100 straight points at last went down when it caught a downgrade. Enough already.
Finally, we know that history says we are supposed to have a retest of the lows before we can really take off. If that's the case this market has a lot more work to do on the downside. I think that the retest argument carries less water than usual because so many companies are doing so well. I can make a case that all we have going on is garden variety selling and we don't need to fear that that we could plummet 800 more points on the Dow. But, again, things become mighty self-fulfilling if we do get a too hot employment number, one that suggests the Fed has to tighten a lot more than we thought and that rates have to go so high that demand for housing and autos could be at risk. As it is we have lost healthcare as an area of any strength, finance is teetering, retail's gotten very tough, the real estate investment trusts are a nightmare and consumer packaged goods stocks have decked their owners. Splunk and Square, as great as they might be, don't make up for all of the damage.
So the market's decline seems, at least to me, to be sobering and rational. It doesn't mean we have to continue slip sliding away. It does mean, though, that the treacherous newer landscape does seem the norm and you have to wait to see the whites of the sellers eyes before you commit any substantial chunk of cash to this market.