Wild market swings like Monday’s late-day reversal are becoming commonplace for a stock market that just last year enjoyed an extended period of remarkable calm.
Wall Street pros increasingly have been advising investors to get used to it. Headline risk abounds, and it’s not just about the potential for a U.S.-China trade war and the perpetual stream of startling headlines out of the White House.
“Let’s face it, the problems for the stock market, and risk assets in general, began long before this verbal trade skirmish between the USA and China,” David Rosenberg, chief economist and strategist at Gluskin Sheff, told clients in his daily note Tuesday. “It all comes down to the simple fact that we are into a totally new and uncertain environment across a broad front.”
Breaking it down, Rosenberg offered 10 reasons why volatility has returned:
- “A new, untested and less dovish Fed” led by Chairman Jerome Powell, who may have a less intense focus on stock market values than some of his predecessors.
- Budget problems caused by big tax cuts that the Congressional Budget Office projects will lead to a $2 trillion deficit.
- A possible trade war that will push up interest rates until the next recession hits.
- An isolationist administration when it comes to trade, which will lead to “disrupted supply chains.”
- The boost markets got last year from tax cuts and a general air of fiscal stimulus has been priced in. Meanwhile, President Donald Trump’s attacks on “Big Tech,” and Amazon in particular, are leading to policy uncertainty.
- “Cracks” in the synchronized global growth narrative. Belief that the world was growing together helped fuel the 2017 rally, but Rosenberg sees multiple big economies slowing down.
- A possible peak in corporate profits that is raising the bar for expectations, meaning it will be tougher for earnings season to impress.
- Related earnings woes, particularly from a U.S. dollar that may have found a bottom after plunging during the first year of Trump’s presidency. Trump has advocated for a weaker greenback as it helps make U.S. multinationals more competitive on the global stage.
- The wild intraday stock moves. The S&P 500 is on track for 100 days of plus-or-minus 1 percent moves, a trend that Rosenberg says typically happens during bear markets (1974, 2001, 2002, 2008 and 2009 are other years when this occurred).
- Circling back to the Fed, Rosenberg does not believe the central bank will come to the rescue if the markets correct. Moreover, the Fed is reducing the size of its bond portfolio just as the U.S. will be flooding the market with bonds to fund the burgeoning fiscal deficits.
Rosenberg advises investors to look for a technical signal — the “death cross” that forms when the S&P 500’s 50-day moving average moves beneath the 200-day moving average. The index made a “golden cross” in mid-2009, in which the 50-day moves above the 200-day, just a few months after the market put in its financial crisis lows.
A death cross is likely soon, Rosenberg said.
“This is the major point — don’t call the market,” he added. “Let the market dictate to you what’s going on — it is flashing something very critical, though classic, late-cycle features right now that deserves our focus and attention.”
WATCH: One investor’s take on how to play the heightened volatility.