It’s not normalisation of US interest rates, but trade war spillovers that are causing market headache, says Peter Cardillo, Chief Market Economist, Spartan Capital Securities. He told this to ETNow during an interview.
It is going to be the worst December for Dow and S&P since the Great Depression of 1931. Several factors are impacting the market mood at this point of time. What would you as an investor and an analyst and somebody who is monitoring the markets very closely be looking out for in a market like this?
To begin with, it is obvious now that we are in a bear market. At least, Nasdaq is in a bear market and, of course, more than 50 per cent of the S&P 500 in the bear market territory. So, we are basically talking about a bear market that probably is going to last at least for another few weeks and possibly react to several negative events that continue to weigh on the market.
The first one is obviously the trade war. I really do not subscribe to the fact that the Fed is to blame for this market decline simply because the Fed is just trying to normalise rates. Since the beginning of the Fed campaign to raise rates, the market was doing pretty good. The real fear here is the trade war and the impact of the trade war that could bring us to a global recession and that is the problem the market is having. It has lost confidence and this confidence continues to erode.
Do you think the markets are now at least trying to price in the trade war and the impact it will have on global markets? Or do you see them still discounting for it and there will be still some more time for them to actually take it into consideration that this could have an impact on the global markets and we will see a volatile 2019?
Well, I can say we are going to see volatility… at least for a month or so. I am hoping that the bear market is not going to be long one. Usually, bear markets do not last more than 90 days or so, but there have been times when they have been longer.
I think that somewhere along the line, the United States and China will have some sort of an agreement and that should help the market regain confidence. We are in a 90-day truce with China and talks are going on and we hope that there will be some sort of an agreement. If not, we are looking at recession not necessarily in 2019, but certainly 2020 is going to be a year of recession.
We also have seen reports about Mnuchin calling top US bank executives to talk about market stability and the liquidity scenario. Even a lot of economists on Street are saying there is not much to worry about as far as the US economic slowdown is concerned. What is spooking the markets so much and at the same time the economists are not too worried about it?
I am not in that camp. I am an economist. We are going to see a slowdown due to the trade effect. I do not think we are going to see recession in 2019. But again if the trade war lingers and there is no resolution within this timeframe the Chinese and the Americans have agreed to, all bets would be off and we could be headed for recession in the later part of this year.
If you look at most economic indicators, some are still quite strong, but there are a lot them that are beginning to turn negative and the good thing is that the job market remains as tight as ever.
But if confidence continues to erode, that could turn rather quickly and so it is a question of the market anticipating a worst case scenario as opposed to maybe a better case scenario and so we continue to see this high volatility and a tumble in the markets.
Look, what happened last week. There was one day when we did lose at least 1 per cent or 1.5 per cent and so that is a lot and when that happens, it means you are suffering from a bad taste of market confidence. Certainly, the market confidence is very very low.
What does the picture look like for Asia, is confidence low here as well? Will they be able to hold out against the developed markets at least in 2019?
None of the markets are going to hold out if this trade war continues. It all depends on the trade war and as I said before, we should get some sort of an agreement and things should turn around. If they do not have an agreement and the trade war is permitted to move on beyond maybe 5-6 months, I would think that the global economy is in trouble or will be in trouble.
We are looking at some sour numbers out of China. Europe is not performing all that well. We have Great Britain departing from the EU and so far no major agreement which means that if they do not have an agreement, once they exit the EU, they could be in for some serious economic downturn.
In the US, numbers are suggesting that the economy is weakening. We saw that with the Philadelphia Fed survey where the north east actually slowed down so much. You can make a number of cases for a slowdown. In fact, probably we are looking at 2-2.25 per cent growth in 2019 as opposed to 2.75-3 per cent.