Trump tweets, value stocks, and zero interest rates

You may not guess it from market indices, but global stock markets have been having a bad wobble over the last few days, even before US President Trump said the Federal Reserve should cut interest rates to zero – or less.

Momentum stocks which have been driven markets higher for a decade have tanked. In a week, value constituents of the S&P 500 index fell 7.1%, according to Bloomberg, amounting to one of their biggest setbacks since the end of the financial crisis in 2009. Technology stocks have suffered, along with blue chips with strong balance sheets capable of dealing with disruption.

It’s also worth recalling that current momentum trades, which have been intact for a decade, do not collapse quickly, for the simple reason investors are reluctant to kiss goodbye to a winning formula

Humble value stocks with a low share price compared to their balance sheet worth surged by 6.2%. They included companies with high dividend yields, which rose 3.6%. They were picked out by Goldman Sachs as a decent investment opportunity towards the end of August. This week, JP Morgan’s influential head of strategy Marko Kolanovic said a big rotation into values stocks is likely to develop given they are really cheap compared to the rest of the market.

The fall in momentum and the rise of value left equity markets looking placid. But will this calm come before a storm?

Teetering bond markets on the back of their rally this year – as well as a nervous rise in the gold price – reflects the market’s uncertainty over prospects. It has become virtually impossible to discern a signal from the movement in bond prices through the yield curve due to unprecedented hedging by investors with liquidity at their command.

It could be a good idea to take your cue from Donald Trump, whose underlying instincts are sound, despite the crude way he expresses them. JP Morgan, for one, has taken him seriously enough to create a so-called Volfefe index to track the impact of his tweets on market volatility. They have had an impact on the market 146 times since 2018.

Trump’s demand for zero interest rates would reflect his fear that the US economy is facing a recession around the time of the next US presidential election and needs a boost. Not least,  because the European Central Bank is on a looser money trajectory. 

You could view the sudden re-commencement of Sino-US trade talks as a way to engineer a revival. Maybe, even, the sudden departure of his hawkish national security adviser, John Bolton.

The market’s wobble will probably be forgotten if Trump comes up with a Chinese trade deal. Small concessions have already been made by both sides. It’s also worth recalling that current momentum trades, which have been intact for a decade, do not collapse quickly, for the simple reason investors are reluctant to kiss goodbye to a winning formula. If sentiment weakens, they are likely to ebb, long before they crash.