The Compound: Stocks React to Negative Economic Surprises
Despite hitting all-time highs last week, markets feel much more defensive. Market structure is breaking down. And stocks may see a pullback from here following months of a narrow trading range.
Why would stocks pull back now? Because investors are looking at a variety of negative economic surprises. That includes the ongoing economic data, as well as new developments occurring daily. With rising uncertainty, a retreat in stocks is the likely outcome.
For instance, one negative economic headline relates to defense spending. President Trump’s plan to cut defense spending isn’t good for defense contractors.
Yes, other countries may increase their spending plans to compensate. But it likely won’t offset the overall decline from a cut in U.S. spending.
Next, President Trump’s plans to shrink the government are deflationary. Yes, most investors want to see waste and abuse phased out. However, the simple fact is that less spending, even if wasteful, translates into a lower GDP.
These economic surprises may be good in the long-term. It can mean a shift away from soaring debts and deficits. But in the short-term, it means that markets face a belt tightening. And markets aren’t fan of that.
So far, markets are unlikely to see a major crash. But a pullback or even healthy correction could be in the cards as the news headlines turn negative.