For anyone who has been keeping up with the market lately, this recent sharp sell-off is simply the “tantrum” we have been waiting on for a while. Over the last few months, I have referenced this multiple times and this type of price action was certainly anticipated.
In last month’s newsletter: “Interest rates could be the game changer. I do believe that higher rates are coming and the fed is the number one threat to the market rally…. It would be very surprising not to see some sort of ‘tantrum’ as the market adjusts to a new, higher interest rate environment, especially if we are close to the end of the economic cycle.”
In August’s newsletter: “Jamie Dimon made comments that echo my feelings about what the market may not be pricing in at the moment. In response to the Great Recession, central banks embarked on quantitative easing (QE) which is a new concept and was employed for the first time in history….. since QE was a new concept that had never been seen ever before and now this is about to be the first time in history central banks will reverse it. As we have mentioned before the markets HATE uncertainty and this QE reversal should be very uncertain. It seems very unlikely to me that we will see central banks around the world unwind this massive program without the markets having a tantrum.”
In June’s newsletter: “What Could Derail the Rally? Right now the most likely culprit is interest rates…. Still the fact remains that we are over 9 years into a bull market that has yet to see rising interest rates. I find it hard to believe we won’t see any more ‘tantrums’ out of the stock market as it adjusts to higher interest rates.”
So why the tantrum now?
To me, this all seemed to take place when the Fed issued their most recent policy statement. This time they had omitted “remains accommodative” (in regard to monetary policy) and my immediate reaction was worrisome. The Fed was telling us that they were on a mission to raise rates and didn’t necessarily care about the stock market as it did in years past. This had all the ingredients for a tantrum, but it didn’t sell off immediately. We had five straight-up days and even a trade agreement replacing NAFTA. However, a few days later the 10-year treasury notes caught everyone off guard when their yields shot up to 3.26% (a 16 basis move in 2 days), which was the highest level since May 2011. This led to a drop of nearly 200 points in the S&P in the matter of days (1500 drop in the Dow).
Is this just another bull market correction or is this the big one?
We are currently still riding the “longest bull market in history” which was built on having accommodative Fed policy. So if that is what drove the upside, we would need to be prepared for what happens when it goes away.
On the other hand, there are still plenty of reasons to be optimistic. President Trump is meeting with Chinese President Xi next month. If they somehow come away with a trade deal, I find it hard to believe that it wouldn’t blow the top of the market and send us racing to new highs. However, I am certainly not holding my breath.
Where we go from here could all come down to this earnings season.
We are clearly at a crossroads here as the market is sitting back firmly in the middle of the trading range in which we have sat for the majority of the year (read July’s newsletter). If companies can deliver earnings here, we can firmly consolidate here and put in a tradeable bottom in the market that could signal for investors to come back into the market. But with the bears wide awake, any earnings’ misses here could continue the momentum lower from here.
Stay tuned as we continue navigating this volatile market…
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Clint Kirby – Chief Financial Strategist
DreamWork Financial Group
Clint Kirby, DreamWork Financial Group, is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.