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The Revolving Door: Tillerson Exit Tramples Stocks

The revolving door in the White House took another spin today. Combined with fresh worries over protectionism, the abrupt ouster of Secretary of State Rex Tillerson was enough to outweigh encouraging data on inflation.

The Dow Jones Industrial Average, the S&P 500 and the Nasdaq all closed lower Tuesday in volatile trading. The Dow was down 231 points at its session low. The Nasdaq snapped its seven-day winning streak.

First the good news. The Labor Department reported on Tuesday that its Consumer Price Index (CPI) rose only 0.2% in February after jumping 0.5% in January. In the 12 months through February, the CPI rose 2.2%, up from 2.1% in January.

Excluding the volatile food and energy components, the CPI slowed to a gain of 0.2% last month after accelerating 0.3% in January. The year-over-year increase in the core CPI was unchanged at 1.8% in February (see chart).

The major factors behind the softer inflation numbers were lower gasoline prices and moderating rental housing costs. Investors were relieved by today’s CPI report. Price growth appears under control, for now.

The latest CPI report came in the wake of positive data last Friday that pointed to a deceleration in wage growth in February.

Friday’s and Tuesday’s data suggest that perhaps the Federal Reserve won’t increase interest rates at its policy meeting next week.

Stocks opened sharply higher on Tuesday morning, as investors cheered the latest signs that inflation would remain tame.

However, as the day wore on, investors had time to digest less sanguine headlines. Wall Street’s mood soured. The culprits: Tillerson and trade.

President Trump on Tuesday fired Secretary of State Rex Tillerson and replaced him with CIA Director Mike Pompeo. The latter is a Trump loyalist. The president made the announcement via his favorite mode of communication, Twitter.

The Tillerson firing came less than a week after Trump’s top economic advisor Gary Cohn quit in protest over steel and aluminum tariffs. Leading contender to replace Cohn is CNBC talking head Larry Kudlow, an ardent supply sider who has consistently voiced support for Trump.

Tillerson’s brief tenure as Secretary of State was rocky, to say the least.

Tillerson previously served as CEO of ExxonMobil (NYSE: XOM). He’s not a man accustomed to mincing words. According to news reports eight months ago, Tillerson called Trump a “f****** moron.” Tillerson never denied saying it, even when pressed by reporters.

Late Monday, Tillerson told the press that the poisoning of an ex-Russian spy and his daughter with a military-grade nerve agent in Britain is “a really egregious act” that “clearly” came from Russia. Hours later, Tillerson was fired.

Many analysts are speculating that Russian President Vladimir Putin, who has Trump’s ear, played a role in Tillerson’s ouster because of the latter’s remarks about the poisoning incident. That’s not clear.

One thing is quite clear, though: The announcement today of Tillerson’s removal dominated the news cycle and clobbered stocks. The positive report on inflation got sidelined.

Wall Street tends to shrug at White House personnel changes, but traders are nervously eyeing the worsening turmoil in the Trump administration. The financial community is starting to realize that perhaps the constant exodus of top government officials doesn’t serve the interests of investors.

Self-inflicted harm…

Stocks were pushed lower today by yet another factor: persistent fears of a trade war. The global economy in 2018 faces its best prospects in seven years. But protectionism could spoil it.

In a report released on Tuesday, the Organization for Economic Cooperation and Development (OECD) raised its global growth forecast for 2018 and 2019 to 3.9%, the highest since 2011, from an initial estimate of 3.6% for both years.

The OECD’s more optimistic forecast is in part because it expects the U.S. tax cuts signed by President Trump in December to serve as a shot of steroids for the American economy.

In its updated outlook Tuesday, the OECD said robust economic conditions are in place for the next two years. Global business investment is resurgent, providing a tailwind for trade growth. But storm clouds loom.

The OECD warned that Trump’s tariffs on steel, aluminum, solar components, and washing machines could undermine the global economy, just when conditions are in place for widespread prosperity.

The OECD expressed hope that a full-blown trade war would not erupt. If it does, the agency said, all bets are off.

Tuesday Market Wrap

  • DJIA: -0.68% or -171.58 points to close at 25,007.03
  • S&P 500: -0.64% or -17.71 points to close at 2,765.31
  • Nasdaq: -1.02% or -77.31 points to close at 7,511.01

Tuesday’s Big Gainers

  • Bluelinx Holdings (NYSE: BXC) +21.58%

Building products distributor buys wholesaler Cedar Creek; BXC spikes for second day.

  • American Vanguard (NYSE: AVD) +14.32%

Chemical maker declares dividend.

  • NorthStar Realty Europe (NYSE: NRE) +12.05%

REIT posts robust earnings.

Tuesday’s Big Decliners

  • CGG (NYSE: CGG) -25.08%

Analysts turn bearish on energy services firm.

  • Tilly’s (NYSE: TLYS) -17.64%

Specialty retailer’s earnings disappoint.

  • Phoenix New Media (NYSE: FENG) -12.76%

Internet news agency issues weak guidance.

Letters to the Editor

“You’ve warned about inflation. Aren’t we just paying the price of the Fed’s irresponsible actions nearly 10 years ago?” — Keith D.

The financial meltdown and recession of 2008-2009 was the worst deflationary event since the Great Depression. In response, the Federal Reserve threw open the monetary spigots by driving nominal interest rates to near zero and “real” or inflation-adjusted rates well below.

These moves helped prevent a global economic collapse. Now, the Fed needs to tighten the money supply in an attempt to maintain equilibrium.

To be sure, loose monetary policy probably laid the groundwork for higher inflation. But the alternative was financial Armageddon.

Questions about Fed policy? I’m here to help:

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.



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