Friday was difficult enough, with stock markets grappling with new tariffs, this time on Mexican imports. On Monday, some big tech companies got more added to their plate.
When news hits the market, this serves to adjust the outlook of the stock market on the issues at hand. For example, when we hear disappointing news about China, or this new Mexican threat, or news of the economy or a particular company, this all re-shapes our expectations of how the particular issue at hand may come out as we take in the new information and incorporate it into stock prices.
The U.S./China potential trade agreement is an excellent example of this in action, as its effects upon the market are substantial, and we can therefore see how the changing landscape affects the prices of stocks. Some new information is more influential than others of course, and the ones of lesser significance will bend the market a certain way in proportion to how the market perceives it affecting things, with the bigger issues such as new tariffs bending things even more.
We took a pretty good hit on Friday as this did involve tariffs and ones that are of obvious concern to American businesses. Some are affected by this more than others of course, and just like the China problem affects countries that do a lot of business in China, tech companies like Apple for instance, there are other companies that are particularly sensitive to changes in price of Mexican imports and they will therefore be more touched by this particular bad news.
This also affects overall market sentiment, and companies that may have nothing to do with the news item that the market is struggling to digest may still see their fortunes wane, because stocks do tend to move together a lot as far as direction is concerned.
It is unusual that an issue that just affects a very small number of companies would have much of an effect upon a stock index, unless those companies are Apple, Facebook, Amazon, and Alphabet, which owns the Google brand. These are huge companies with a market capitalization of $3 trillion dollars, and together, they can certainly move an index like the Nasdaq by themselves.
There were some real concerns that Friday’s selloff would spill into Monday, and during the first few hours of trading on Sunday night, when the futures market opened, it sure looked that way. We did test the bottom of this early down move in the middle of the night in the U.S., but things held up and we ended up having a positive day from there, other than the Nasdaq that is.
Monday’s trading with the Dow and the S&P 500 did shed some light on the market’s mood, and every time the bears put together a downward rally, it was soon met by a bullish rally. We went back and forth like this several times during Monday’s session, with the overall message that while we may not have the power to make a comeback just yet, we held the fort pretty well, and this is a time where the fort is definitely under attack.
A Little More Scrutiny Goes A Long Way it Seems
The mood with the Nasdaq was negative all day though, where we opened lower and then continued to move down all day. The three major stock indexes don’t really deviate all that much, but today was one of those days where they really did. The Nasdaq did put in a little rally in the last hour of the day, trimming losses a bit, but nothing that would provide much confidence that the short-term bottom may be here.
Facebook was already reeling from Friday’s performance, where they fell from $183.01 to $177.47, but at the end of trading Monday, the stock dipped all the way to $164.15. That’s 10% in just 2 trading sessions. The bad news is that Facebook is being scrutinized by the Federal Trade Commission.
Alphabet has given back 7% over the last 2 days, with almost all of this coming on Monday. The Mexican tariffs didn’t scare investors much but this new news of their being watched by the U.S. Justice Department sure did.
The Justice Department is also said to be watching Amazon and Apple. Amazon has dropped 7% since the market close on Thursday, while Apple has been relatively unscathed since then, only losing 3%. Apple stock has now lost 18% since May 3 though, and after breaking out to the downside lately, 3% more is not the road back.
It is not that anyone is being charged with anything, or fined, or expect to be at a real risk of either, as this is all just a matter of the government increasing its scrutiny with these huge tech companies. We also learned that the House Judiciary Committee will be launching its own investigation into the competition within the tech industry, possibly concluding that the size of these companies restrict competition.
We hear such accusations all the time, and while having titans like Apple and Google battle it out actually improves competition if anything, when we use the term competition, we may mean the number of competitors, not the amount of competition overall, which is far from the same thing.
We should not even care about how few competitors there are in a market, and while having just one isn’t a good idea, as long as there are more than one, there are no intrinsic barriers to their competing and they will do so rather zealously with so much on the line.
If we have one mega competitor along with much smaller ones, we then might want to argue that this huge player might restrict competition, although the onus is on us to show that competition has been restricted by way of something other than a company being so successful.
We may prefer some sort of balance though, like with Apple and Android, and when you don’t have this, you can end up with a situation such as we see with Walmart moving into town and competitors falling by the wayside. Walmart sells things more cheaply and are a lot more efficient and those who cannot compete may indeed go out of business, and often do.
Being More Efficient and Providing More Value Should Not Be a Problem
In a free economy, our ultimate goal, there are gains and losses, with business moving from the inefficient to the more efficient, where efficiency is understood in terms of value. Having business taken away from those providing less value is not a problem overall, it’s a benefit.
These merchants would undoubtedly want to restrain Walmart in some way to knock them down to closer to where they are, but given the goal here needs to be to promote efficiency, this would be the absolute wrong thing to do. If Walmart can sell the things we want to buy more cheaply, it makes no sense to want to force us to pay more just because we want the more expensive merchants to have their pockets lined more. This is what you call restraint of trade and the government doing it instead makes it no less oppressive, but perhaps even more distasteful.
The pursuit of this is not capitalism, it is not the free market, and it isn’t even good economics. It’s terrible economics in fact, and the reason why we seek out restraints of trade is to prevent them from creating inefficiencies, and we therefore really don’t want to be intentionally creating them ourselves.
Companies who hold a dominant market position in their given market, provided that they achieved this success honestly, and not, for instance, the way that Standard Oil did it in the 19th century, by using their size to intentionally block competitors, are healthy for the overall market and for the pursuit of efficiency.
If we take action that will cause Amazon to need to charge us an extra 10% when we buy something there, this clearly hurts both the economy and the customers who are paying this extra amount. It doesn’t matter how we do this, whether we impose fines, break up the company, or whatever, if the effect of our action is to create such inefficiency, making things cost more on purpose under the guise of wanting to make things better.
As obvious as this may be, emotions can get in the way, and while this doesn’t mean that we’ll see this drum beaten as frantically as some left-wing Democrats do, there at least is the potential for a little drumming to come out of this.
Regulators don’t always follow basic economic principles when they rule, and often the goal appears to simply seek to punish companies with little or no regard to purpose or justification. As long as we can justify such things by just citing how big a company is, this is going to be a real risk.
If we do wish to seek out wrongdoing with big companies, that is not just a worthy goal but a necessary one, but doing everything right and so right that you are dominating the market is far from any wrongdoing.
In the Microsoft antitrust case, we at least had the basis to argue that their software bundling did lead to a situation that restrained trade somewhat, and this could be conceived to be tied selling, which involves one product or service being bought as a requirement of obtaining another.
This was nothing worthy of breaking up the world’s largest software company though, or close to it, and Microsoft ended up settling for just agreeing to benefit their competitors a little, an odd but telling solution for the government. In our current situation with these four current tech titans, their biggest crime appears to be to provide so much value to people that they are kings of their hills.
We do not want to take this news and put this together with the views of people like Elizabeth Warren, who wants to break up companies like this, and this is currently a very long way from that sort of vendetta.
The key word here is scrutinize, and that’s what the agencies will be doing. We would hope, actually, that companies this big get plenty of scrutiny, where actual wrongdoing can be detected and dealt with swiftly and effectively.
This is therefore just smoke at this point, but when you see how much this smoke got in the eyes of tech investors, this seems to indicate a bigger problem. If we can see moves like we saw on Monday just because there is more scrutiny, this may show just how fragile these companies are right now in the eyes of the market.
Unless we get new news on this, this water is now past the bridge and we will move on to what objects float past us on this going forward. Stocks overall do not seem to be taking the potential Mexican tariffs much harder than they did Friday, although that may have cracked the egg a little more, and further bad news may have a bigger impact than it would otherwise.
There’s no real indication that Facebook, Apple, Amazon, and Apple have much to worry about with this news, but they already are under plenty of pressure, especially with the ongoing problem with China. It probably won’t take that much to send them lower, so we need to be on our guard for this right now.