The Dow Jones index declined by more than 1% as the market reacted to a series of negative data. The US and China are likely headed towards a disastrous trade war among a pandemic. Meanwhile, the US economy is crumbling, and the earning season has been disappointing. Against this backdrop, a former analyst at Goldman Sachs is warning investors that the stock market could drop by more than 40% this year.
Dow Jones slides after Warren Buffet disastrous quarter
Warren Buffett, the most successful investor of our time, suffered a major setback in the first quarter. The company lost almost $50 billion in the quarter as his investments declined. Among the worst-performers were airline stocks like Southwest, American Airlines, and United Airlines. His financial holdings also declined as their stock prices fell partly because of the low interest rate environment. The company has been selling stocks and investing in treasuries.
Warren Buffet has lost the momentum. As shown below, the total return of Berkshire Hathaway stock has been about 132% compared to the S&P 500’s 190%. This lagging is partly because Buffett has avoided investing in high-growing technology stocks like Google and Facebook. He has also made some bad bets such as his investment in IBM and Kraft Heinz.
Berkshire Hathaway total return vs S&P 500
Trade war bells ringing
The Dow Jones index is also falling because of the likelihood of a new trade war between the United States and China. On the one hand, the US has blamed China for causing the coronavirus pandemic. Over the weekend, Mike Pompeo said that the US had found evidence that the disease originated from a lab in Wuhan. He said this two days after Trump said that he had found evidence and threatened new tariffs.
China has refuted the claims. In a statement, the director of the lab in Wuhan said that the lab does not have the ability to develop the SARS virus. Additionally, China has blamed the US for not reacting early to the early warnings about the pandemic.
A new trade war is the last thing that the world and the Dow Jones needs. This is mostly because a tariff war does not work in the first place. A report released earlier this year found that the tariffs Trump placed on Chinese goods caused American firms more than $46 billion. The reason is that China has perfected the art of manufacturing, meaning that it would be cheaper for companies to add prices than move from the country.
Goldman Sachs analyst warns of danger ahead
In a call to MarketWatch, Will Meade, a former Goldman Sachs analyst predicted that the rest of the year will be worse. He said that the recent price action reminded him of the dot com bubble when stocks bounced back before dropping suddenly. He also said that the upcoming US election would weigh on stocks. He said:
“The Nasdaq in 2000 did a similar bear market bounce as stocks this year — dropped 40%, then bounced 42% off the bottom retracing 61.8% of its drop. It stalled then fell 43%, making a new low four months later.”
The Dow Jones is also falling at a time when investors are talking about selling in May and going away. In a recent opinion by Barrons, Nicholas Jasinski said that in the past, buying stocks in November and selling at the end of April has been a successful strategy. He said that the Dow Jones has gained by just 2% between May and October since its inception.
On the daily chart, the Dow Jones index found significant before reaching the 61.8% Fibonacci retracement and 100-day EMA level at $25,075. The price has also dropped below the 50% Fibonacci retracement level at $23,705. Therefore, bears appear to be in control. I expect that they will attempt to retest the 23.6% retracement level at $23,000.
On the flipside, a close above $24,000 would invalidate this price action because it would send a signal that there are still buyers in the market. This price is an important psychological level, slightly above the 50% retracement and along the 50-day EMA.