The Stock Market Is Not the Economy

The stock market is a derivative of the real economy. It is not the economy. It is heavily influenced by psychology and valuations (those often line up, which is why the market is a good barometer of social mood). The stock market is headed lower at current valuations. The Federal Reserve is raising interest rates and shrinking its balance sheet, the ECB is set to end QE and raise rates, and China is slowing credit growth. If interest rates rise in teh absense of higher inflation (the current environment), stocks are overvalued. If rates fall because of deflationary forces or an economic recession, stocks are overvalued. I went short the market the day I posted this: Markets Do Not Believe Trade War Coming

I don't think a tariff dispute will be a single event like Brexit and the U.S. presidential election. Instead, it will likely drag on as the North Korea situation did. If China fires back with fiery rhetoric or a strong retaliation, even if it is also a set up to negotiations, I suspect markets will react poorly. It will be remarkable if they don't. Several charts including China, Germany and Japan Hedged (DXJ) aren't far from support. South Korea (EWY) would need to fall 20 percent to hit support. China (FXI) needs to slid a little more than 7 percent to fall below support.

I shorted the Nasdaq and oil exploration companies.

China will either bounce or breakdown soon.

I believe (my money is where my mouth is) that the social mood has turned and the peak in the stock market is probably in (if not, I expect the top could be 12-18 months out). The public, both political left and right, is turning on Big Tech. The drip drip of negative news on Tesla (Tesla Bonds Are in Free Fall) and Musk's failed April Fool's joke, Trump knocking Amazon, driveless car tests suspended, trade wars, increased political polarization all point to negative mood. During negative mood people see the negative instead of the positive and stock valuations are based on the most optimistic views at the top. As optimism fades (perhaps driverless cars are 10 years away instead of 5 years away) stock valuations fall with it. As mood turns negative, people focus on bankruptcy risk and return of capital instead of return on capital.

Corporate earnings should decline if interest rates rise and/or structural economic reforms (including immigration reform) increase wages. Wealth inequality hit a cyclical peak; labor's or government's share will increase. Government intervention in some form, be it trade wars or new regulations, will increase.

The economy is in a depression and can't grow faster than 2 percent. Whether the economy grinds along at 2 percent, or more likely slides back towards 0 to 1 percent or recession, the stock market will move lower. It hit peak optimism, it priced in an inflationary recovery, but this is as good as it gets.