The Stock Market on the Orient Express

Everybody did it in Agatha Christie’s novel Murder on the Orient Express, and the same problem bedevils the U.S. stock market today. A dozen co-conspirators killed the victim in the Christie novel. Here are a dozen factors that bedevil the stock market:

1) Bond yields continue to rise even while the broad stock market indices tank — an unusual event. That, as I argued earlier this week, is in part due to the overstretching of bank balance sheets, which makes it hard for foreign investors to hedge currency risk in U.S. portfolios.
2) Corporations spend more buying back their own stock than on capital expenditures, reducing the number of shares outstanding and thereby increasing the ratio of earnings to shares. That does nothing for productivity or long-term growth, and can’t go on forever.
3) Corporate profits in the U.S. actually fell during the year ended in the second quarter of 2018, before adjustment. Federal statisticians say this was due to accelerated depreciation under the 2017 tax cut, and adjust the data to show a shadow profit. But the raw numbers show a decline, and shadows are just shadows.
4) Oil prices are going up and that’s bad for consumers.
5) Tariffs on China are hitting the U.S. supply chain and cutting corporate profits for many companies.
6) The Federal Reserve thinks that everything is wonderful and is raising interest rates.
7) Consumption continues to rise, but that is increasingly dependent on increasing credit card balances.
8) Hourly and weekly earnings are barely keeping pace with inflation.
9) Purchases of major household assets like homes and cars are falling, and likely to fall further with higher interest rates, and homebuilders and car companies are among the market’s worst performers.
10) Tech companies that got rich providing software to run on cheap hardware imported from China have to reckon with higher costs for electronics under a 25% tariff regime, and can’t sustain their lofty multiples.
11) The United States is pursuing a new Cold War with China, as the doyen of conventional wisdom, Walter Russell Mead, put it in the Wall Street Journal. That goes beyond trade war and raises strategic risks.
12) The Republicans are likely to lose control of the House of Representatives in next month’s midterm elections, adding to an already chaotic atmosphere in Washington. Say what you want about President Trump, but he has been good for the stock market, and a Democratic revival won’t be.