Interesting article on The Bulwark site today:
Follow the Money - by Jonathan V. Last - The Bulwark
"When the New York Stock Exchange opens on Monday at 9:30 a.m. we will see just how seriously the world takes the assault Elon Musk and Donald Trump launched on the American system of government.
What follows is a guide for interpreting the drop."
"First, some ground rules. The securities markets have a system of circuit breakers to halt massive declines. There are three circuit breakers that are measured by calculating a percentage decline in the S&P 500 from the close of the previous day: Level 1 (7 percent), Level 2 (13 percent), and Level 3 (20 percent). If Levels 1 or 2 are tripped before 3:25 p.m., all trading is halted for 15 minutes. If Level 3 is tripped at any point in the day, trading is halted for the remainder of the day."
"Last Friday the S&P closed at 6,041. Trading ended at 4:00 p.m., per the norm, but at 1:15 p.m. a selloff started when reports of Trump’s proposed tariffs against Canada and Mexico hit the wires. In less than three hours,
Here are the S&P’s circuit breaker numbers for Monday:"
Level 1: 5,617
Level 2: 5,255
Level 3: 4,832
"For context, since 2008 we have only had seven S&P drops greater than 7.6 percent in a single day:
"The two worst of these were in March 2020 as the markets began to grasp the full ramifications of COVID. The other drops all took place at the opening of the 2008 financial crisis.
So those are the kinds of events that trigger large-scale panic in the markets: global pandemics and global financial meltdowns.
Will Monday’s pullback register on those magnitudes? Or will it be more modest and hold under 7 percent?"
"The answer to that question will tell us what the markets believe about Musk’s and Trump’s intentions. Here are four scenarios:
(1) Drop is < 5 percent: The markets do not believe that Trump’s tariffs on Mexico and Canada are likely to remain in place. Nor are they especially concerned by the reports of turmoil in Washington over the weekend. They basically believe everything is normal and that Trump will quickly revert to par, allowing the broader economy to continue more or less as normal.
(2) Drop is 5 percent to 7 percent: The markets are concerned that Trump’s tariffs will impact the American economy in the near term and that this movement could trigger broader recessionary risks. They believe that Trump might be responsive to market pressure, but they aren’t sold on this hope.
The markets are focusing all of their attention on the tariffs—trying to divine how long they’ll be in place and what the magnitude of the damage will be. They haven’t begun to process what went down at Treasury over the weekend.
3) Drop is 7 percent to 9 percent: The markets are spooked. It’s not a full-blown panic, but no one knows which end is up or what the exit strategy might be. The fear is that tariffs have opened a Pandora’s box that, combined with instability in Europe and the increased potential for instability in Asia, raises the possibility that things could get bad.
Though no one is ready to start speculating on just what this land of bad might look like."
(4) Drop is > 9 percent: A selloff of this magnitude would suggest absolute panic at the worst level in living memory. (Other than COVID and the 2008 financial crisis, you’d have to go back to the crash of 1987 to find an analogue.)
"At this level, the market is signaling that it has no confidence in the near-to-medium-term American economy and cannot even begin to price the tail risk."
The author makes the point that,
"The financial markets are the only thing that can stop Trump’s reign of chaos."
So it sounds like a drop in the 5-7% area would be a good thing, not enough to cause a panic, but enough to get the attention of the financial concerns.
This stuff is really more in the wheelhouse of Anne and Jim, than mine. So maybe they can read the tea leaves better?