With the big decline in stocks today, let’s take a look at the historic one-day declines of similar magnitude (or more) …
This is the S&P 500 futures. As you can see this roughly 5% or greater decline has some rare company.
Interestingly, among these severe declines is a down 5.4% day on February 5th of 2018.
And while it wasn’t directly attributed, at the time, to tariffs, it came just two days before the effective date of a 30% tariff on solar panels and a 20% tariff on washing machines — mostly all having to do with China.
The next day was the low of a 12% decline.
The decline was from the record highs, and happened over the course of just six days. And it took a little more than six months to regain new record highs.
Guess what else happened on February 5, 2018?
Jerome Powell was sworn in as the new Fed Chair.
Trump tax cuts had just been signed into law two months earlier. And just three days before Powell took the helm, a hot employment report hit, with the hottest wage growth since prior to the Global Financial Crisis. Government bond yields were already on the move (trading to the highest levels in four years, around 2.7%). And Trump had just kicked off tariffs.
From the outset of the Trump administration, the Fed viewed Trump economic policies as inflationary, and started to exit emergency level policies of the prior eight years. They started a series of mechanical interest rates hikes.
By the time Powell became Fed Chair, they were several months into quantitative tightening. And there was clear concern in markets about the potential of a misstep by an inexperienced Fed Chair, in dealing with the unknowns of quantitative tightening.
With that, we have the plunge in stocks today, of similar magnitude to this February 2018 day. And we have the “tariff” commonality.
Also, like in 2018, we have plenty of Fed influence on the stock market correction.
In the current case, we have a Fed that has hit the pause button, early into the easing cycle, even as they have rates at historically restrictive levels (continuing to put downward pressure on the economy and on inflation).
And, again, they’ve judged, based on their actions and their forecasts, that the balance of risks from the Trump policies would skew toward inflationary.
But both the bond market and the stock market over the past two months seem to be telling us the Fed pause was a mistake.
As we’ve discussed many times in my daily notes, the turning points in markets over time tend to be determined by some of form of monetary policy adjustment. You can see it in the chart, just over the past four years.
In the current case, we should expect the Fed easing cycle to re-emerge.