By Dave Moenning on Dec 20, 2018 07:03 am
I'm not sure whether it was the late Marty Zweig or his buddy Ned Davis who originally coined the phrase, but it appears that after yesterday, anyone long the stock market may now officially be fighting both the Fed and the tape!
Investors came into Wednesday in a hopeful mood. And at one point, the Dow Jones Industrial Average sported a gain of nearly 400 points on the session. This was no small feat given the fact that the tally on the Dow's dance to the downside since December 3 stood at more than 2150 points and the venerable index had fallen -12.1% from the late-September high. And when glancing around at the rest of the major indices, that number actually looks good compared to the drop of -13.1% seen on the S&P 500, the dive of -16.03% on the NASDAQ, the decline of -15.8% on the S&P Midcaps, and the -20.9% hit the Russell 2000 had endured.
Nevertheless, the thinking was that stocks were oversold (this is true), sentiment had become bleak (also true - and usually a good thing from a mean-reversion perspective), valuations had improved (check), the government was going to stay open (it turns out the jury is still out on that one), and that Jay Powell was going to usher in what was sure to be a stunning Santa Claus rally.
There was hope that what is commonly referred to as a face ripping rally would propel the S&P 500 back into positive territory for the year and everyone could enjoy their New Year's Eve parties knowing that their 401K's had grown a smidge in 2018.
Bah Humbug
But a not-so funny thing happened on the way to the stock market party. Yea, that's right, it didn't happen. Instead of the expected Kris Kringle imitation, Jay Powell donned his Ebenezer Scrooge costume and queued up When Doves Cry as his theme song for the post-announcement press conference.
Sure, Powell used the phrase "data dependent" (isn't that what we all wanted a month ago?). And yes, he did kinda, sorta acknowledge the concept of #GlobalGrowthSlowing with his "troubling cross currents" verbiage. But the bottom line is the new Fed Head flat-out bonked on the idea of "one and done," which is apparently what the trading computers wanted to hear.
At first blush, Powell's commentary seemed quite logical. Heck, the economy in the U.S. is doing just fine, thank you. Unemployment is low. Wages are growing. And although everybody knows that the current rate of inflation isn't likely to persist, the recent data did provide Powell & Company "cover" to go ahead and hike rates again by 25 bps yesterday. If for no other reason than to prove their independence from the Twittershpere.
Fed Independence
On that note, the President's continued public and not-so subtle disenchantment with Fed policy may have contributed to the Fed Chair's less than dovish tone. Instead of talking about being "just under" neutral and perhaps reconsidering the plan for rate hikes in the coming year, Mr. Powell stuck to his independent guns and said his group would do what they needed to do.
The Machines React
The markets (oops, I mean, the trading algos) received the message loud and clear (and without the assistance of a single tweet from members of the FOMC). Within an hour, the Dow shed nearly 900 points. Yikes.
The good news is that the market then stabilized and for once, didn't finish at the lows of the day. And while there was still time in the session for things to get really and truly ugly, the Dow actually advanced 160 points off the low. So, as some are saying, it could have been worse. Small victories, right?
What's Next?
This sets up the hope that traders will come to their senses, "rethink" the Fed's intention, and trigger the kind of day-after recovery that has occurred recently once the post-Fed dust has settled. One can hope.
Then again, it is important to recognize that the technical damage done to the market indices is immense. Make no mistake about it; the action is bad - very bad. Major support has been obliterated. There is now a series of lower highs and lower lows. Stocks can't rally on "good news." Moving averages have broken like toothpicks (and now become resistance). And lest we forget, every single intraday "rally" (a term used loosely these days) has been sold - and sold hard.
In speaking to a couple of my fellow gray-haired colleagues yesterday afternoon, the thoughts were the same. This tape is horrid and something we haven't seen in a very long time. This isn't like 2015/16 or even 2011. No, as I opined to one of my advisor clients, "This is an old-school bear market playing out with new-school trading computers."
So, where do we go from here? The easy answer is down. The logical answer is, up (we're due for a bounce at the very least). The problem is there is now significant resistance overhead (meaning LOTS of folks would LOVE to reduce exposure at higher levels) and a distinct lack of potential bullish catalysts. Insert long sigh here.
But with a market that is THIS oversold and sentiment THIS negative, there is always hope for a counter-trend move - ESPECIALLY at this time of year. So, in closing, I'll reuse the title of my last missive, Here's Hoping Santa Makes The Trip This Year. Fingers crossed. Because if Santa doesn't show, investors may enter 2019 fighting both the Fed and the tape.
With stock market in a correction, is a recession just
ahead?
Some say the market is overreacting to bad
news — but what if it's not?
Dec 14, 2018 @ 5:14 pm
By Bloomberg News
Prices bounce around, emotion obscures logic, signals appear and
vanish. The reasons for treating equities as a poor barometer for the economy
are many. Right now, that might be for the best.
Pools of gloom await anyone looking for a message in stocks.
There's the $3 trillion in value erased, the bloodbath in banks and the
trouncing in transports. In wonkier circles, shrinking valuations and negative
rolling returns have started to ring the recession bell. A relatively calm week
in the Dow Jones Industrial Average just ended with a 495-point thud.
It's a pastime on Wall Street these days to look at the carnage,
add it all up, and announce that the market is wrong. But what if it's not?
After all, even if equities have predicted "nine of the last five
recessions," as the economist Paul Samuelson famously said, that's a
better record than a lot of humans.
"I usually come down to the side of the market, because the
market represents the collective views of a tremendous number of
investors," said John Carey, a fund manager for Amundi Pioneer Asset
Management in Boston. "The market can be wrong, but I never dismiss it out
of hand."
As of Friday's close, the S&P 500 was down 11.3% from its
September close, with more than half its constituents nursing bear-market
losses of 20% or more. The Nasdaq 100 has fallen 13.9% from its record close in
August, while the Russell 2000 Index of small-cap stocks has lost 19%, leaving
all three with declines for 2018.
Make no mistake: the pros say the sell-off doesn't mean much.
Looking at the S&P 500's downward trajectory over the last 12 months, David
Kostin, Goldman Sachs's chief U.S. equity strategist, reckons the market is
pricing in zero economic growth. That's too pessimistic, he said, as the firm
sees a 2.5% expansion next year.
Robert Buckland, Citigroup's chief global equity strategist,
employed a similar approach in assessing the future of corporate profits. The
MSCI World All-Country Index is now pricing in a 1% decline in earnings in
2019, below the 5% increase that he and his colleagues forecast.
"Our models suggest that global equity may now be too
bearish on the earnings outlook," Mr. Buckland wrote in a note Thursday.
"This suggests investors should buy the dip."
Fair enough, but each time the sell-off deepens, the implications
get a little harder to shake off. Take forward valuations and the idea that
market's price-earnings ratio embeds an estimate for next year's profits. Since
Bloomberg began tracking the data in 1992, the S&P 500 at this time of year
has stood at an average of 17.4 times income that ended up materializing in the
next year.
Assuming stocks are now valued at that average, it would equate
to the market predicting $152.50 a share in 2019 earnings, not the $174.50
estimated by analysts. In other words, while Wall Street predicts 9% profit
growth for next year, the market could be said to see a 5% decline.
Sure, markets overshoot, and sentiment gets carried away.
Corrections like this one have occurred six other times since the bull market
began in 2009. They all sparked growth scares. But none of them a recession.
"The market is wrong," said Anik Sen, global head of
equities at PineBridge Investments. "Clearly it has been a slowdown, but
the slowdown can be very transitory in our view. At the end of day, there is
enormous pent-up demand, whether it's capex or technology spending. None of
that has changed."
Still, anyone heeding strategist calls shouldn't forget Wall
Street's propensity to lean bullish. Over the past two decades when stocks
suffered two bear markets, professional forecasters have never once predicted a
down year. Economists don't see one now, either. Eighty-nine surveyed by
Bloomberg generate an average prediction of 2.6% growth in gross domestic
product next year.
Meanwhile, a 2014 study by Prakash Loungani of the International
Monetary Fund found that not one of 49 recessions suffered around the world in
2009 had been predicted by the consensus of economists a year earlier. Loungani
previously reported that only two of the 60 recessions of the 1990s had been
anticipated a year in advance.
Threats to the economy are clearly multiplying, from U.S.-China
trade tensions to the Federal Reserve's monetary tightening to Brexit.
"The way the market is pricing right now is it's pricing in
negativity of macro events, and they should," Paul Richards, President of
Medley Global Advisors LLC, said in a Bloomberg TV interview. "These are
big events and if they go wrong, people would lose more money."
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