On any given evening, you’re likely to hear Sixties pop music wafting through our household. The kids roll their eyes, but I pay the mortgage which means I control the stereo.

Today’s market rout made me think of The Mamas & the Papas, who had it right in 1966 when they sang: “Monday, Monday, can’t trust that day.”

This year, fresh trade sanctions have typically emerged on a Monday, after the White House has floated trial balloons on the Sunday gabfests. Stocks invariably head south on the news.

This particular Monday followed the same depressing pattern.

Expectations arose today that President Trump was on the verge of announcing new tariffs on $200 billion worth of Chinese goods. Trump said details would be revealed after the close of regular trading. Beijing vowed immediate retaliation. Right on cue, the major stock market averages plunged. The CBOE Volatility Index (VIX) jumped 11.43%.

The tech-heavy Nasdaq fell the hardest, pulled down by Apple (NSDQ: AAPL) and Amazon (NSDQ: AMZN).

Apple declined 2.66% on fears that tariffs and tapering iPhone orders would dampen the firm’s growth. Amazon plunged 3.16%, in the wake of allegations that employees took bribes to delete negative product reviews.

The trade war looms as a persistent threat to financial markets, but losses have been kept in check by robust economic and earnings growth.

The fact is, despite the increasing harm wreaked by the global trade war, the economy enjoys powerful tailwinds. Below are three charts that tell the positive side of the story.

The first sanguine trend is the declining national unemployment rate, which stands at 3.9% through August 2018 (see first chart):

Source: Bureau of Labor Statistics

That’s the lowest unemployment rate since 2000 and a sign that the job market continues to grow more competitive. As the economy reaches “full employment” and companies scramble for skilled workers, pressure is increasing on wages (see second chart):

Source: Bureau of Labor Statistics

With fatter pay envelopes, consumers are more willing to shop. Retail sales cooled last month but they’re still healthy on an annualized basis, lifting the fortunes of the retail sector.

Not all retailers have benefited. “Big box” and department store chains that haven’t been nimble enough to transition to e-commerce are losing ground to innovative retailers that are taking the fight to Amazon.

That said, consumer confidence remains high as Americans enjoy the “wealth effect” that prompts them to loosen their purse strings (see third chart):

Source: The Conference Board

These positive trends have placed a floor beneath stocks. But they come with plenty of caveats.

Accelerating economic growth this year is in large part born of stimulus from the federal budget that Congress passed last year. Federal spending rose at a 3.5% rate in the second quarter, while at the same time the $1.5 trillion tax cut has decimated tax receipts for the U.S. Treasury.

The result is a massive federal budget deficit that will come back to haunt markets in the form of greater inflation and higher interest rates. Goldman Sachs (NYSE: GS) recently predicted that the deficit could mushroom in size by about 2.5 times, to $2.05 trillion, by 2028.

Tightening the spigot…

As inflation gathers speed, it’s likely the Federal Reserve’s Federal Open Market Committee (FOMC) will announce another hike in the fed funds rate at its meeting next week. The Fed raised the rate to 2% at its June FOMC meeting.

Trump has chastised the Fed for raising rates this year, violating a long-time tradition whereby presidents refrain from interfering with the U.S central bank. Regardless, pressure from the White House is unlikely to sway the Fed from its decision to incrementally tighten the monetary spigot.

The tax cut package signed into law in December has thrown considerable fuel on inflationary pressures. The tax savings are temporarily feeding corporate coffers and the stock market, but the fall in tax receipts will eventually starve the economy.

Much of the windfall from corporate tax savings is going to stock buybacks and dividend increases, which is great for shareholders over the short term but not so great for sustainable, long-term economic health. Indeed, the economy is expected to sputter in 2019, pulling down corporate profits.

Running deficits during a recovery to stimulate the economy is akin to burning the furniture to heat the house. When the fire goes out… well, that’s when the real trouble starts.

Large-cap stocks are poised to stumble as their high valuations collide with reality in the form of rising inflation, higher interest rates, and slowing economic growth. We saw an inkling of that today, with the sharp declines of Wall Street darlings Apple and Amazon.

Corrections usually catch investors off guard. As the song goes: “Monday mornin’ you gave me no warnin’ of what was to be…”

Monday Market Wrap

• DJIA: 26,062.12 -92.55 (0.35%)
  
• S&P 500: 2,888.80 -16.18 (0.56%)
  
• Nasdaq: 7,895.79 -114.25 (1.43%)
  

Monday’s Big Gainers

• Quantum (NYSE: QTM) +14.93%

Data storage maker clears accounting probe.

• ObsEva (NSDQ: OBSV) +12.41%

Analysts bullish on biotech’s drug pipeline.

• Cellcom Israel (NYSE: CEL) +9.74%

Israel-based telecom enjoys booming market.

Monday’s Big Decliners

• Charah Solutions (NYSE: CHRA) -12.24%

Commodities slump hits mining services provider.

• Altimmune (NSDQ: ALT) -10.28%

Analysts turn bearish on immunotherapeutic small cap.

• Arcus Biosciences (NYSE: RCUS) -8.42%

Wall Street pessimistic over biotech’s clinical trials.

Letters to the Editor

“Should investors worry about corporate debt?” — Matt L.

Yes, there’s currently $3 trillion in outstanding U.S. debt rated triple-B, up from $686 billion a decade ago. Triple-B represents the lowest-quality debt that qualifies for investment-grade status. Now that interest rates are rising and a recession looms, highly leveraged firms are susceptible to downgrades and defaults.

Any specific investment topics you’d like me to cover? Let me know: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.