Larry Kudlow, the Reagan administration economist who advised the Trump campaign on policy, said today’s market sell-off was more related to movements in the bond market than to the release of a secret memo that accuses FBI and Justice Department investigators of bias.
“I doubt if there’s much linkage between this FISA memo and the market,” Kudlow said, referring to the Foreign Intelligence Surveillance Act. “If anything, the President’s position is bolstered by this memo, at least that’s my initial take.”
The Dow Jones Industrial Average on Friday fell 666 points, or 2.5 percent, the biggest decline since June 2016. The S&P 500 stock index lost 2.1 percent and the Nasdaq Composite dropped 2 percent.
House Republicans released a memo written by congressional aides that accused the FBI and Justice Department of abusing their surveillance powers to spy on a former Trump campaign adviser, Carter Page, the New York Times reported. The memo prompted a political firestorm.
Led by Representative Devin Nunes of California, chairman of the House Intelligence Committee, Republicans said the memo revealed an abuse of surveillance powers by the executive branch as it probed Russia’s interference in the 2016 election and ties to the Trump campaign.
"I think it's terrible, if you want to know the truth," President Trump said when reporters asked about the memo. "I think it’s a disgrace what’s going on in this country... A lot of people should be ashamed of themselves, and much worse than that."
Kudlow said investors need to keep an eye on the bond market’s reaction to economic data such as wage growth. Employment surged in January and wages rose the most in more than 8-1/2 years, data from the Bureau of Labor Statistics showed on Friday. The report led investors to expect that inflation will push higher this year as the labor market hits full employment.
Average hourly earnings rose 2.9 percent from a year earlier, the biggest increase since June 2009, compared with a 2.7 percent gain in December. But the average workweek fell to 34.3 hours, the shortest in four months, from 34.5 hours in December.
“The economy is now moving at a much higher growth trajectory, as a consequence principally of the tax reform bill which has been embraced by corporations faster than almost anybody thought possible, including me,” Kudlow said on CNBC. “That means interest rates have to adjust. The Fed may be a little stingier, we’ll see.”
Kudlow was among the economists who advised Donald Trump as a presidential candidate. Trump ran on a pro-business platform of cutting taxes and regulation while spending $1 trillion on infrastructure like roads and bridges. In December, Trump approved a sweeping tax reform bill that cut corporate tax rates and urged companies to transfer trillions of dollars held overseas back to the U.S.
Stocks are reacting to a surge in bond yields, with some fund managers saying 3 percent U.S. 10-year rates would signal a bond bear market. Those rates hovered at 2.85 percent on Friday. The 3 percent level may trigger a correction in equities, Bloomberg News reported. Typically, a 10 percent market drop is considered a correction.
“If you’re operating a stock market model of capitalized corporate profits, which is my favorite model, the discount rate, I prefer the Baa corporates but if you use the 10-year Treasury and you multiply that through your profits expectations, the market has to adjust,” Kudlow said. “It will be a downward adjustment, and this may take a bit.”
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