Nothing is making sense in the markets right now.
It’s only been five days since the Federal Reserve decided to keep rates at 0%, a move that caught about half of Wall Street’s economists and about 1-in-4 traders flat-footed.
And since then, everything in markets has gone against what most people expected.
The Fed’s decision, and Fed chair Janet Yellen’s subsequent press conference, were widely interpreted as dovish, meaning the Fed emphasised that it was not looking to pull the trigger on raising rates with the global financial situation so unstable.
To investors, this means interest rates lower for longer, which in the last few years has meant an increased appetite for risks assets — namely: stocks.
But in notes following this statement, a number of strategists have said that ingrained habits in investors over the last several years will no longer work out.
“Making healthy investment returns when QE-inspired asset inflation is all but played out, emerging markets are slowing, Europe is stagnant and the Fed is showing a distressing lack of leadership, is going to be really, really difficult,” Societe Generale’s Kit Juckes wrote in a note to clients last Friday.
In short, the easy money has been made.
In a note early Tuesday, Peter Tchir at Brean Capital noted that since the Fed meeting, the S&P 500 is down about 4%, the dollar has gotten even stronger, and Treasuries have strengthened less than one would expect given the magnitude of the move in stocks.
“I think these 3 trades stand out as how incorrect consensus was, and I don’t think the damage is done,” Tchir wrote. “I continue to believe, as we did coming into this mess, that the situation had changed and the market needed to see a hike to do well.”
And instead of a rate hike, what the market got was no action from the Fed, little promise of any imminent action, and continuing uncertainty around what happens next.
When US investors woke up Tuesday morning they were greeted by futures sharply lower and Volkswagen, one of the world’s largest car companies currently embroiled in an emissions-testing fiasco, down another 20% for the second straight day.
You could point the finger at Volkswagen for triggering a sell off in the market — the way people sometimes reference the 1989 stock market sell-off triggered by the failed United Airlines leveraged buyout — and some folks pointed a finger at Hillary Clinton’s tweet about the need to end “price gouging” in the drug industry sending biotech stocks sharply lower on Monday.
But this analysis is about half-right. And as Jamie Lissette, who runs The Hammerstone Group, an information service for traders, noted on Monday, the market right now is a “tinderbox.” Anything and everything seems to be spooking markets and triggering outsized moves either up or down.
On Tuesday, Josh Brown — one of the best financial writers out there right now — captured the problem with looking at the market right now and sticking with any one kind of analysis.
Brown noted that sure, stocks look cheaper because their price has fallen relative to their earnings. But as Business Insider’s Sam Ro noted, earnings are also falling. And so your forward estimates of earnings probably need to be revised or even thrown out altogether.
Again, everything we think we knew about the market has started to change and change fast.
On Monday Brown wrote that the stock market’s uptrend fuelled by easy money from the Fed has been broken.
Last week we wrote that the stock market was “coiled,” waiting to break out from a narrowing range.
Something is going to happen.
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