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Stocks Plunge Amid Darkening Political Clouds

By John Persinos on March 19, 2018

Markets tanked on Monday, caught in the downdraft of brewing political storms. “Headline risk” is back. With a vengeance.

The three main stock indices sharply fell across the board today, in the wake of reports that Facebook’s (NSDQ: FB) user data was secretly misappropriated during the 2016 presidential election to assist Donald Trump. The news drove markets to their largest one-day drop since February 8. The Dow turned negative for the year; the index was down as much as 493 points at its session low.

All primary 11 S&P 500 sectors ended in the red today, led by technology. Facebook’s woes dragged down the tech-heavy Nasdaq. Facebook closed the day down 6.77%, its worst daily decline in two years. The CBOE Volatility Index (VIX), the “fear index,” jumped more than 22% today.

Reports surfaced over the weekend that the personal data of 50 million Facebook users were hijacked and misused by a London-based data mining firm called Cambridge Analytica.

Cambridge Analytica allegedly provided highly detailed profile data to the Trump campaign that it used to develop Facebook ads during the 2016 election. The private firm was funded by conservative billionaire Robert Mercer and led by former Trump advisor Steve Bannon. The accusation is that the hacked Facebook data allowed Bannon and his team to weaponize “fake news” on the social media platform with targeted precision.

The disclosures about Facebook, made by a Cambridge Analytica whistleblower, has triggered state and federal investigations. On Monday, prominent lawmakers in the U.S. and overseas expressed outrage and demanded answers. Tighter regulation of social media could be forthcoming; social media stocks plummeted today.

Cambridge Analytica denies the accusations. Facebook announced late Monday afternoon that it would hire a forensics auditor to examine the firm. If proven, the data breaches would have violated federal and state laws. Facebook claims it didn’t know about the breaches, but lawmakers allege that the firm’s executives knew and turned a blind eye in the interest of profit.

U.K. leaders also charged that Cambridge Analytica’s hacked Facebook information was used to stoke racial prejudices in that country, to facilitate the victory of the “Brexiteers” in the 2016 referendum on the European Union. Members of Congress and the British parliament have called upon Facebook CEO Mark Zuckerberg to testify before their respective committees. CEO testimony in front of angry lawmakers is rarely good for a company’s stock.

Wall Street’s mood was further soured by President Trump’s Twitter tirade on Sunday against his perceived enemies in the FBI. Trump’s highly public battle with the FBI, CIA, NSA and other spy agencies is heating up. The president also has been attacking his own Department of Justice.

A showdown between Trump and Special Counsel Robert Mueller appears imminent. In recent days, Mueller has intensified his search for evidence that Trump colluded with Russia or perhaps committed other crimes, such as money laundering.

All this comes in the midst of personnel shake-ups in the White House, as Trump defenestrates a lengthening list of top officials, including his Secretary of State.

Trump has indicated that more firings are to come. By his actions and words over the weekend, Trump seems poised to fire Mueller. If that happens, it would cause a constitutional crisis. The stock market would almost surely plummet.

The administration’s “America First” policies pose another political risk. With the departure of free traders such as economic advisor Gary Cohn, the protectionists have free rein in the Trump administration. Trump has signed steep tariffs on steel, aluminum, solar components, and washing machines. Further tariffs are in the works. A global trade war appears likely. In a trade war, no one wins.

My takeaway? It doesn’t matter if you’re a Republican or a Democrat; this circus won’t end well for anybody.

Regardless of partisan stripe or political affiliation, investors are unnerved by the extraordinary turmoil in American politics. Hence today’s market rout.

Strike out on interest rates?

Another danger for the stock market is Federal Reserve tightening. There’s an old Wall Street adage: “Three hikes and you’re out,” whereby the third interest rate increase by the Fed in a single cycle usually leads to a decline in stocks.

Investors are worried that stocks will strike out.

The two-day meeting of the policymaking Federal Open Market Committee (FOMC) starts on Tuesday. The analyst consensus is that the FOMC on Wednesday afternoon will announce a rate hike of a quarter basis point. The real concern, though, is that Fed policymakers will view economic conditions as strong enough for four hikes this year, one more than the Fed initially planned.

Economic data scheduled for release this week will help traders determine whether the Fed will tighten more than three times. On the docket in coming days:

MBA Mortgage Applications, Existing Home Sales (Wednesday); Jobless Claims, Bloomberg Consumer Comfort Index, Leading Indicators, the Federal Housing Finance Agency’s House Price Index (Thursday); Durable Goods Orders, New Home Sales, Baker-Hughes Rig Count (Friday).

As the old Chinese curse has it: “May you live in interesting times.” Buckle up for what promises to be an interesting week.

Monday Market Wrap

  • DJIA: -1.35% or -335.60 points to close at 24,610.91
  • S&P 500: -1.42% or -39.09 points to close at 2,712.92
  • Nasdaq: -1.84% or -137.74 points to close at 7,344.24

Monday’s Big Gainers

Maker of paper production products announces strategic moves to boost shareholder value.

Analysts give bullish rating to solar module maker.

Real estate services firm becomes target of buyout from peer.

Monday’s Big Decliners

Software firm issues lower guidance; CEO departs.

REIT disappoints on operating results.

Social media giant caught up in political scandal over data breaches.

Letters to the Editor

“I’ve noticed a lot of insider selling with one of my core holdings. Should I be concerned?” — David H.

If corporate insiders are suddenly dumping a stock, they know something that the rest of us don’t.

It’s often a tip-off that the people running the company realize that the stock is about to underperform the market. But there’s a caveat: sometimes insiders sell for personal financial reasons that aren’t related to the health of the company.

If only one corporate insider is selling, or if the stock has run-up quite a bit, it may simply indicate an individual’s desire to pocket profits. But if several corporate insiders are all selling within a short period of time…watch out.

Got a question about political risk and how it affects your portfolio? I’m here to answer your questions:

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

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