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What Broke the Market…and What Comes Next

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#1 dTraderB



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Posted 09 February 2018 - 07:37 AM

Again, don't be fooled by the propagandists who want you to believe this is a temporary "volatility decline"

It is not that markets cannot rise with higher interest rates; no, it is the new paradigm, the end of easy money, the rise in debt by trillions, and the irrational exuberance phase of the equity markets. This is the transition phase that will result in much pain and losses. And, with a simpleton in the WH, there is too much unpredictability. 


Good Barron'' article:

What Broke the Market…and What Comes Next
Ben Levisohn
Updated Feb. 8, 2018 7:25 p.m. ET

On Jan. 26, the stock market was sitting at an all-time high. Investors everywhere were marveling at what an impressive start to the year it had been—and what an astounding run stocks have had for the past nine years, adding more than 300% from their 2009 post-financial-crisis low. And, then, things suddenly fell apart.


The Standard & Poor’s 500 had been up 7.5% this year through Jan. 26, on pace for one of the best Januarys ever. But since late last year, even some market strategists, who generally tilt toward the sunny side of the Street, have been noting that measures of optimism and economic strength were headed toward levels that would be hard to sustain. After years of wariness about equities, investors had finally thrown in the towel, pouring cash into stock mutual and exchange-traded funds. And they were paying little heed to warnings that higher interest rates and bond yields would trip up the bull.

Yet, that’s just what happened. The 10-year Treasury yield surged 0.443 of a percentage point on Feb. 2, to a four-year high of 2.852%. Yes, that’s still a low yield by historical norms, but it’s the direction of yields that matters. In this case, yields jumped on the threat of higher inflation, after the January payrolls report, released that morning, showed that U.S. wage growth had increased by the highest monthly rate since 2009.

The Federal Reserve typically seeks to tame accelerating inflation by increasing interest rates, which leads to higher longer-term bonds yields. Higher rates make funding more expensive, while higher yields make bonds more attractive relative to stocks. And that can make the market's valuation--it had been trading well over 20 times 12 month trailing earnings--look, well, excessive.

Much of the recent market environment – and the bull market itself – had been predicated on interest rates staying low. In the years since the financial crisis, investors had grown accustomed to a world with low inflation and sluggish, but predictable growth. Corporate earnings benefited from those trends, too. But faster growth, greater inflation, and rising bond yields signal that this comforting world is a thing of a past. Economic growth likely will pick up due to the passage of the new tax law, adding to inflationary pressures. The going bet, now, is that the Federal Reserve will continue to lift rates, and thus tighten credit..and maybe to a degree that produces an economic recession.

The market appears to have woken up to such risks in the course of just a few days. With yields rising, stocks sold off, and bets that market volatility would remain low, well, forever were unwound. The Cboe Volatility Index, or VIX, spiked to 50.3 after trading near 9 at the beginning of the year, affecting a variety of financial instruments, including options, futures, and exchange-traded products, even killing one exchange-traded note. Through Monday's close, the Dow Jones Industrial Average had dropped 1840.96 points since last Thursday, or 7%.

On Feb. 6., though, the VIX fell 20% to 29.98, and the Dow gained 567.02 points, or 2.3%, to 24,912.77, and the market has tried to build on those gains, even if much progress wan't made. The stability didn't last long. On Thursday, the Dow dropped 1032.89 points, or 4.1%, after a stronger-than-expected jobless claims report sent the 10-year Treasury yield heading closer to 2.9%. By the end of the day, the market was officially in a correction.

There could be more selling ahead, because equity investors are still adjusting to what may be a new yield backdrop. Wednesday's tepid 10-year auction suggests it may be. But even a protracted readjustment won’t spell the end of the bull market. Economic growth is still too strong. Company earnings are still on the upswing, and classic signs of a recession, including an inverted Treasury yield curve, aren’t apparent. The recent selloff has also taken the S&P 500's valuation down to 16.4 times 12-month forward earnings estimates, from about 18.3 times.

Yes, the days ahead will be volatile, and painful for investors. But stocks still have more room to rise....eventually.






#2 da_cheif



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Posted 09 February 2018 - 09:19 AM

BARRONS written by mostly those who are still wet behind the ears and like the rest of the media are and have been clewless about the stock market    

#3 JamesE



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Posted 10 February 2018 - 03:28 PM

So....some random stock trader on a random Internet site is somehow qualified to call a billionaire businessman a "simpleton"? 🤔

Please enlighten us with your crendentails or maybe just stick to posting about the market bud.👍☺