We are now in the third month of the stock market decline, with the S&P 500 getting close to correction territory (i.e., down 10 percent from the peak). Although there have been three attempted rallies, in each case the market has declined again. From a technical perspective, important trend lines have been broken, which increases the risk that the decline could get worse. Is it time to worry?

Last week was a busy one on the economic front, with several key reports. This week’s data starts with prices and whether they indicate that inflation is picking up.

We closed the last post in this series with the observation that, even if the U.S. “won” the trade war, there would be collateral damage—both here and throughout the world. That turned out to be a timely point, as we have seen in the financial markets over the past week.

As we approach year-end and you look at your investment statements, there is bound to be much discussion about how your investments performed. As has become usual in the past couple of years, there will be questions about and comparisons between what we expected and what we actually got. In other words, with the economy doing well, why aren’t your investments doing better?

Yesterday’s market drop reversed all of Monday’s gain and then some, reportedly on growing doubts regarding the exact terms of the trade war truce announced by President Trump. That might be the case, but I suspect the headlines pointing out that part of the yield curve had inverted played a bigger role in the decline. This inversion is usually a sign of economic trouble, so it would make sense for the market to pull back. The problem is that, while technically true, the inversion we saw typically indicates that trouble will show up in a couple of years—if it does at all. If the market was reacting to the inversion, it was overreacting.

November was a rocky month. Concerns surrounding the midterm elections, the trade conflict between the U.S. and China, and the economic slowdown resulted in market turbulence. Still, the financial markets bounced back. Here in the U.S., the Dow, the S&P 500, and the Nasdaq all had some gains. Abroad, the emerging markets rebounded strongly. Even bonds made money, despite interest rate turmoil.

Last week was a busy one on the economic front, giving us a wide range of views on where the economy is going. This week will also be busy, with several key reports.

We closed yesterday's post with the idea that the U.S. has been the indispensable market for all rising economies since WWII—starting with Europe under the Marshall Plan and then extending to Japan and subsequently to China and eastern Europe. As the essential market, the U.S. could compel obedience in other areas, notably security, and other countries were happy—or at least willing—to comply.

In the last post, we laid out both the U.S. imperative (keep the status quo and improve it if possible) and the Chinese imperative (make a successful economic transition to a developed, wealthy economy). We also outlined how China has changed its strategy from what has been so successful over the past 40 years, and we closed with a teaser on the U.S. response.

We closed yesterday’s post with the conclusion that the confrontation to watch is between China and the U.S. and that, at least for the next decade, the conflict is likely to be economic and not military. This is often characterized as a trade conflict. Indeed, that is how it is playing out in the headlines. In fact, however, trade is a symptom and not a cause.