Where Do We Go From Here?
So, this is what risk, fear, and volatility feels like…
It’s an unusual feeling given that the S&P 500 has been marching steadily higher for nearly two years. In fact, the S&P 500 had been above the 200-day moving average since November 19, 2012.
On Monday, the S&P fell below this key technical support level. And that’s the end of one of the longest uninterrupted uptrends in history.
I saw the writing on the wall back on September 24th. That’s when the Fed officials were talking about an exit strategy and the timing of their first rate hike.
I wrote…
“One thing the Fed has proven time and time again is they can’t predict the future. In fact, they suck at it. Their expectations have proven to be too optimistic.
They’ve gotten it wrong about the pace of job growth, wage growth, economic growth, inflation, and just about everything else time and time again.
So why do we give these guys predictions about where interest rates will be in 18 to 30 months any thought at all?
What’s more, the one thing the Fed has proven to be is flexible and willing to change and adapt to economic data.
So we’re likely to see the Fed’s ‘dot plot’ change dramatically as the economic data doesn’t match the FOMC members expectations… and given their history, I’d say there’s about a 99.9% chance the Fed is wrong on this one too.”
Well, here we are less than a month later and it turns out the Fed was dead wrong about their optimistic forecast. But I’ll admit that I underestimated the impact the Fed’s misstep.
Here’s the thing…
There’s a large group of people that believe the 2008 financial crisis put the US on the same path as it was following during the Great Depression.
The fallout from these types of catastrophic events is very different than a typical economic downturn or recession. The economy doesn’t recover from these types of events in a few months or years. They can take a decade to work through.
Right now we’re feeling the impact of the Fed prematurely ending their stimulus programs and talking about normalizing interest rates. And there are all too real fears that the US is on the verge of repeating the same mistakes they did after the Great Depression.
Simply put, tightening monetary policy at a time when fiscal policy is already a drag on the economy and we are still dealing with the long term effects of a financial crisis is a recipe for disaster.
As a result, we’re seeing massive amounts of money flooding out of risky assets and into risk free assets like US Treasuries.
The way I see it, the Fed’s bond buying program had taken the risk out of owning risky assets like stocks, high yield debt, and commodities.
Now the Fed is done pumping money into the market. So, it just became a lot riskier to own things like stocks.
Here’s the bottom line…
The factors that fueled one of the longest uninterrupted uptrends for stocks have changed. The uptrend is over. And we’re facing a new market environment without the Fed’s safety net for the first time in years.
After such an incredible run, stocks are entering into a new consolidation phase. There will be more volatility and uncertainty than we’ve been used to.
And these conditions are likely to last until we understand what it’s like to own risky assets without the Fed taking away all of the market risk or until the Fed steps back in to take away the market risk again.
Good Investing,
Corey Williams
Category: Market Analysis, What's Going On?
