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What Makes the Stock Market Wobble?: Rising Interest Rates and Trade Wars – 5/2/2018

Posted May 2, 2018

The stock market wobbles when the Federal Reserve consistently raises interest rates. This is normal as businesses and consumers need time to adjust to higher financing costs. In response to the Fed increases, the 10-year U,S, Treasury yield passed through the 3% threshold for the first time in four years. The yield on the benchmark 10-year note influences borrowing costs for consumers, corporations, and local governments. Even so, at 3%, interest rates are still lower than they were 11 years ago.

The 10-year Treasury yield at 3% signals economic confidence. Rates are going up due to strong economic fundamentals. According to Factset, a financial data company, the S&P 500 is on track to post a 25% year-over-year earnings growth. Just imagine if you received a 25% raise in your net income! This is what American business is producing.

Facebook revenue is up 50%, and net income is up 65% from a year earlier. Twitter, with a 21% rise in quarterly revenues has been profitable for the last two quarters and expects to be profitable for all of 2018. Amazon, Microsoft, and McDonalds are all reporting strong earnings growth. Caterpillar grew sales by 31% due to strong global growth in mining and construction. However, Caterpillar management warned that this may be the “high watermark,” meaning that the rising cost of steel due to tariffs is squeezing margins, and this may be as good as it gets; this caveat sent Caterpillar shares down 6.2% in one day.

The stock market is not responding to stunning earnings growth, and Julie Sweet, CEO of Accenture North America knows why: Taxes are down. Job growth is strong. Interest rates remain low. Business conditions are almost ideal, but there is always one big ‘unless.’ Like everything is great ‘unless.’ And the ‘unless’ is if there is a trade war. Tariffs are already in effect against China, Russia, and Japan, which have raised the cost of steel, aluminum and other materials. Trump has given Americans a tax cut, but he may take it all back and then some with bad trade policies that increase the cost of almost everything. And, tariffs kill more jobs than they save or create. Just ask George W. Bush.

To end on a happy note, Apple sold 52.2 million iPhones in Q1, which is in line with analysts’ expectations, and beat earnings expectations with $2.73/share vs. $2.64 estimated by Wall Street. Apple stock rose 4% in after-hours trading. The market focus will return to corporate earnings. Keep the faith.

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