Yes and no. The news of Gary Cohn’s departure broke shortly after the stock market closed yesterday. This timing may or may not have been intentional. They powers-that-be may have wanted to avoid a tumultuous trading day yesterday, hoping that the news would cool overnight. As I type this, futures are pointing to a negative open. So, the news didn’t cool.
This is what’s known as “headline risk,” the risk that a headline causes a negative reaction in the stock market. Headline risk can cause swings in individual companies when they engage in bad business dealings or have a major environmental event (like a rig explosion). But, headline risk can also cause swings in the overall stock market when investors worry that the subject of the headline will have a negative impact soon. Headline risk does not indicate that fundamental or systemic risk actually exists. In fact, in this case, the economy and American businesses are still okay.
I try to remain apolitical in my work-related Insights and client communications. I’m going to take a stab at handling this in an apolitical way.
Studies of economics and history have shown that protectionism, such as with a steel tariff, could be bad for trade which in turn would be bad for the economy. All of this is a long-range view. It’s not a short-term view. Yet, the market is reacting over very short time periods. Gary Cohn has been regarded as a stabilizing force, a voice of reason in President Trump’s ear when it comes to economic policy. Cohn is the man for the job and is highly qualified to do the job. Now that he’s out, there’s a vacuum—a void that must be filled. No one knows who might take that position next, but there is some speculation that it could be Peter Navarro. He’d be more of a “yes man” for Trump. Navarro is known to lean toward protectionism in terms of policy preferences.
Who reacted to the headline? My guess is individual retail investors. Institutional investors with healthy long-range views don’t enter orders to sell overnight driving futures lower. Scared people who think they can predict the markets enter overnight orders to sell in the morning. The market will open lower but could bounce back and end the day positive. Or, if the morning trade drives markets low enough, then technicals could take over and the market could dive further. This would be if we traveled through some support level that investors are using and it triggered additional selling.
It’s reasonable to fear a trade war. A trade war would have a negative impact on the economy down the road. However, that’s still an unknown. A healthy jobs report came out this morning saying that we added 235,000 jobs in February. So, while everyone worries about what could be, the evidence in front of us says that things are good right now. That’s anxiety. The most successful investors trade on clear evidence of things that exist, not speculation or a “feeling” about market behavior.
