How did everything get so bad so quickly? Is this the new, suboptimal normal? In many ways, yes, because what you are seeing is the collision of so many worlds that is getting tough to fathom.
Why don't we start by saying that the market's not really reacting all that rationally. It is moving with the speed of light as algorithms act like machine guns mowing stocks down and taking no prisoners, guilty or innocent.
Today was the first day in ages where I saw legitimately positive earnings surprises, I mean genuine good news, a company reporting a spectacular quarter, not just being ignored but, oddly, being punished as if a company missed on the top and the bottom line. That's what I mean by not being rational, although the really negative among you will recognize that kind of action as classic bear market behavior. The market is emotional, insanely emotional and during the most ugly and some would say terrifying moments of today we could have heard that a company got a takeover bid and its stock still would have fallen. Yes it is that bad out there.
Of course, if a company reported a bad quarter, if it disappointed, no matter what management said, no matter how good a face was put on the numbers, it was disastrous. Your stock got annihilated. You have to go back, again to the lead up to the Great Recession to see such dislocations on news.
It gets worse. Now that we see the whites of the eyes of the earnings season companies are missing numbers left and right. I mean it is just incredible how bad the ratio is. And if they make the quarter it means nothing because their forecasts could be abysmal and so the printed numbers, the good old beat and raises have nothing to do with how a stock fares. You get something like a Texas Instruments (TXN) which reported a terrific quarter but then issued an abysmal forecast with no further explanation other than business is slowing and then it is "katy bar the door."
How could all of this be happening at once? How can companies report terrific quarters and then have such trepidation about the future?
All I can say is that if you have been watching the show or reading me there is nothing new here: tariffs and rates are the culprits and now they are intertwined in a nightmarish way for the stock market.
In fact I cannot recall a more convoluted moment than this one when it comes to global and domestic events. That's because we have the two most important influencers to the stock market in a totally destructive tug of war where both sides are wrong. That's right, the president and the fed chief have staked out opposite sides of the economy and the loser, the real loser is you, the investor.
Let's address the war camps, so to speak, so I can tell you exactly how tense everything is. We know the president has been adamant that the biggest risk to the economy is the Federal Reserve's desire to raise rates and raise rates quickly in order to quell inflation before it really takes off.
We know the Fed is all about raising rates in lockstep just once in December and then three times next year because it sees the economy accelerating and it wants to be sure that inflation doesn't get out of control. The Fed is looking at employment and deciding we are full up and wages are going to spiral higher even as we are barely up 70 cents year over year.
Now what's ironic is that both the Fed and the president are indeed wrong and they are wrong about the same thing. Both think the economy is red hot but the data that we have gotten in the last few weeks and the earnings reports we are getting are tepid at best and in some cases downright nasty.
Housing had been weak as we know. And autos have been slowing too. But now we have a whole new level of worries and the worries stem directly from China via the White House. Company after company is now referencing the tariffs and trade issues and supply problems as reasons why they are forecasting a downbeat future. Why? Because no matter what happens someone will have to pay for these tariffs, the consumer, the manufacturer or the seller.
Just last night, for example, IRobot (IRBT) , the company that makes that really cool Roomba, some of which can cost $700, announced that it would eat the cost of the China tariffs and not pass them on to the consumer. Boom, even though the company reported fantastic revenues its stock was crushed.
But it is damned if you do and damned if you don't. If the retailer eats it, the chain's numbers got down. If the consumer eats it, the sales go down. If the manufacturer eats is the profits come up short.
It's a Roomba market. What a world.
It gets worse. We know that there are ways out of this mess. China could blink and we wouldn't have to worry about disrupted supply chains, who eats what and, yes, higher tariffs starting in 2019. But I think things have only gotten worse as the month drags on-and drag on is the operative term. The rhetoric's gotten worse, the stakes higher and it no longer feels like a trade skirmish or a trade tiff or even a trade war. It seems like a full blown cold war and if you recall, we didn't do a lot of business with any of our Cold War sparring partners since the term was invented after World War Two, Our goal was to topple the regimes we opposed, not to feed them with more commerce. So, unless China blinks soon we are going to have to start baking number cuts into companies that touch China in any way shape or form.
Then there's the Fed. We should think that this institution should blink and move away from the one rate hike this year and three next year. But the problem with that is the President himself. He's been hectoring Jerome Powell, the Fed chief, almost daily now and his jabs aren't anything like we have seen in our lifetimes. Last night he's openly provoking Powell by saying that raising rates seems to make him happy.
What's Powell supposed to do? If he blinks now how does the institution look? What kind of independence does the Fed have after that. But if he doesn't blink then the economy could crushed as it was when the Fed raised rates non-stop right into the Great Recession. It sure looks like that's what is going to happen especially when you hear that new homes sales were horrendous, worst in a couple of years as rates have made many homes unaffordable. That's the 5% mortgage rate that chills housing.
Now we know that things can work out for the better. Stocks can go down enough and correct themselves on their own. We see the consumer packaged goods stocks flying because they offer good dividends versus declining rates. But then again, rates are declining because business isn't so good. That's a tough way to make things better. Look, we aren't out of the woods. There's lots of bad news everywhere. Prices are adjusting,
But that said, don't be a hero. The worst may not be over.
Because the president and the Fed think the economy's red hot, and after these last few days, we know that both are sorely mistaken.