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Rate Woes Sink Wall Street…Again

Thursday marked yet another bad day on Wall Street, but brace yourself. The slump probably won’t end soon.

Several adverse market trends are firmly in place and inexorable. Or as my wife Carole, the family cook, would say: They’re baked in the cake.

Major stock market indices closed deeply in the red today, extending recent losses. The biggest fear was rising interest rates.

A summary of the September 25-26 Federal Open Market Committee session was released yesterday, in which Federal Reserve officials expressed unanimity in adhering to a hawkish stance on monetary tightening.

The yield on the benchmark 10-year Treasury today rose to 3.182%, a seven-year high. The CBOE Volatility Index (VIX) jumped 15.98%.

Aerospace/defense stocks fell amid concerns that the scandal over the torture and murder of dissident journalist Jamal Khashoggi at the hands of Saudi Arabia would jeopardize big arms sales to the Saudis. The benchmark SPDR S&P Aerospace & Defense ETF (XAR) slumped 1.96%.

Market leaders have suffered the worst in recent days, falling below their 50-day or even 200-day lines. All of the FAANG stocks cratered today.

During the past 11 days, the Dow Jones Industrial Average and tech-heavy Nasdaq closed lower eight times and the S&P 500 nine times. Volatility is rattling Wall Street; much of the turmoil stems from sector rotation.

Investors are transitioning away from momentum growth stocks toward safer sectors more appropriate for the late stage of a recovery, such as consumer staples and health care. These stocks are better equipped to weather the storm if the economy sputters because of higher rates and trade conflict with China.

The trade war between the world’s two largest economies continues unabated. At the center of this titanic fight are soybeans.

Soybeans were the biggest U.S. agriculture export to China last year at a value of $12.3 billion. Soybeans are a crucial foodstuff with a wide variety of uses, such as in animal feed and vegetable oils.

Reports surfaced today that China’s soybean imports are on course to drop by 25% in the last three months of 2018, their biggest fall in at least 12 years. Buyers are curtailing purchases due to the trade war.

China in July imposed a retaliatory 25% tariff on U.S. soybeans as part of the tit-for-tat trade conflict. Soybean imports by China are likely to decline to around 18-20 million tons in the fourth quarter, compared with 24.1 million tons in the same year-ago period.

Your move, Mr. Trump…

China is the world’s biggest soybean importer. In response to U.S. tariffs, China this season has canceled a huge amount of orders with U.S. producers and nearly tripled purchases from Russia

Yes, Russia is profiting from Sino-U.S. hostilities, yet another sign that the Russians are adroit players of geopolitical chess.

America is estranged not just from China but from its traditional allies, such as Canada and the European Union. The leader who benefits most from America’s growing isolation is Russian President Vladimir Putin.

Paradoxically, among the biggest losers in Trump’s trade war are his staunchest supporters who live in “red states” in the agricultural heartland.

To make up for the shortfall in American-produced soybeans, China is subsidizing a big increase in the country’s domestic production of the crop. Farmers in the U.S. Farm Belt are feeling the pain, making the trade war a contentious political issue with less than three weeks to go before the midterm elections.

The trade war also is hurting the world’s third largest economy, Japan.

Japan’s finance ministry reported Thursday that the country’s exports fell for the first time in nearly two years, due to the trade war and global economic slowdown. Japan’s exports in September fell 1.2% from a year ago.

Wall Street has counted on strong corporate earnings to outweigh these concerns. However, profit margins are starting to come under pressure.

According to research firm FactSet, several S&P 500 companies have lamented rising costs during their third-quarter earnings calls.

These price pressures include wage growth from a tightening labor market; rising energy prices; the upward trajectory of interest rates; risks from the trade conflict; and an exploding U.S. federal deficit that boosts borrowing costs.

Inflation is heating up. The following chart shows the annual percentage increase in the U.S. Consumer Price Index (CPI), from 2012 to 2018:

(*projected) Source: International Monetary Fund

Among geopolitical risks is the train wreck called Brexit.

European leaders on Thursday canceled plans for a special summit to finish a deal for Britain to leave the European Union. Negotiations over Brexit remain at loggerheads, with London and Brussels still far apart on terms.

The consequences are particularly grave for Europe’s financial services sector, which depends on a smooth-running London. Brexit’s toll on London, the banking hub of Europe, is poised to spill over into the region.

The upshot: Stay invested but raise cash levels. Further sell-offs are likely. The bull market? As my spouse the baking aficionado might say, stick a fork in it.

Thursday Market Wrap

  • DJIA: 25,379.45 -327.23 (1.27%)
  • S&P 500: 2,768.78 -40.43 (1.44%)
  • Nasdaq: 7,485.14 -157.56 (2.06%)

Thursday’s Big Gainers

  • Endocyte (NSDQ: ECYT) +50.39%

Biotech agrees to Novartis (NYSE: NVS) buy-out.

  • TC PipeLines (NYSE: TCP) +9.11%

Energy MLP reduces estimate of tax bite.

  • Alcoa (NYSE: AA) +5.80%

Aluminum giant raises profit outlook.

Thursday’s Big Decliners

  • Insteel Industries (NSDQ: IIIN) -19.30%

Steel maker’s operating results disappoint.

  • Mountain Province Diamonds (NSDQ: MPVD) -16.06%

Diamond miner’s profits plummet.

  • Netflix (NSDQ: NFLX) -4.93%

Streaming video giant caught up in tech sell-off.

Letters to the Editor

“What’s a safe way to beat inflation?” — David W.

Among your best bets are Treasury inflation-protected securities, or TIPS, which are indexed to inflation. TIPS are low-risk because they’re backed by the U.S. government and their par value rises with inflation, as measured by the CPI, while the interest rate stays fixed.

What additional tips (so to speak) about fighting inflation? I’m here to help: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.

 

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