Did the News Drive Monday's Big Stock Drop?

Did the News Drive Monday's Big Stock Drop?

US stocks experienced their biggest selloff since the November election as immigration policy changes dominated the headlines. The dollar weakened as investors moved money into safe havens including the yen, precious metals, and US Treasury notes. 

While Pres. Donald Trump's order on immigration drew a great deal of attention in the news and social media, it may not be the cause of the drop in stock prices on Monday. Certainly, it may have contributed momentum or been a catalyst to some extent. However, it's important for traders to separate their analysis of the markets from their analysis of public policy. The two do influence each other, but it may be an oversimplification to see a market's behavior as a collective judgement by investors about a particular policy. 

The S&P 500 (Nadex US 500) gapped lower on Sunday evening (US Eastern time), continuing the downtrend that began last week. Last Friday we mentioned the "Friday-Monday Effect," a traders' rule that says that markets often continue Friday's price action on the following Monday. Today was an example of that. 

The drop was particularly strong in the tech, energy, and airline groupings. The immigration ban on seven countries does appear to affect at least two of those groups. While long-term effects on travel to and from the US are tough to predict, over the weekend, hundreds of people were stopped or detained. Moreover, thousands of people assembled, without any central coordination, to protest the executive order. The crowds have not blocked travelers, but any disruption could hurt airline companies which already have tight profit margins. 

The tech sector has been the most outspoken, in part because it is especially hard hit by anti-immigration policies. Next up is a plan to restrict the H1-B visa for highly-skilled workers. Companies like Alphabet, Microsoft, and Apple depend heavily on H1-B employees. Politics certainly plays a role in the protest, as do genuine differences of perspective. The CEOs of Google and Microsoft are both immigrants (from India), though not Muslims. And many have noted that Apple's late founder, Steve Jobs, was the son of a Syrian refugee. Syrian refugees are now banned from entering the US. 

While policy issues are important, since our focus is on trading, it's important to remember that the markets are not in the business of commentary. Monday's drop in stock prices may coincide with the protests and debates, but it isn't necessarily caused by them. After all, the drop began last Friday, before the executive order was signed Friday afternoon and before the protests and three judicial rulings came out. 

This week, the president is planning to announce his nominee for the Supreme Court on Tuesday. He hasn't announced any economic initiatives yet. The only major event this week which has direct impact on investors is the Feb 1 meeting of the Federal Open Market Committee. 

The Fed is not expected to announce a rate increase this month, however. Having just raised rates in December, the Fed is unlikely to add another move until it can gauge the progress of inflation and job growth. If anything, the recent uproar may make the Fed more cautious. 

Investors have said they will watch the Fed's remarks closely to see if these policy changes and proposals play a part in the Fed's deliberations. Overall, however, you can look at the price charts of US stock indexes and see them as nothing but profit-taking after a long rally to new highs. 

The stock markets added an estimated $2.5 trillion in value since November. It makes sense that some investors would want to cash out, just to take profits, even if they continue to be optimistic about the future. 

It may help to think of it this way: if you hadn't followed the news at all since Novemeber 8 and all you had was a price chart, what would you conclude? Post-election rally? Check. Profit-taking after new all-time highs? Check. Anything that terribly unusual? Not really. 

This is not to dismiss the importance of civic engagement. It's just a reminder that investors aren't always voting on policy with their buy and sell orders and the markets aren't constantly reacting to the news. We shouldn't blindly do so, either. Sometimes the markets move for reasons of their own and it's better to just trade them than try to explain them. 

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