Stocks have now declined for eight consecutive sessions, something that apparently hasn't happened since the bad old days of the credit crisis (and for the record, the S&P 500 hasn't fallen nine straight days in 36 years). In the process, the S&P has snapped trendlines, support zones and moving averages like toothpicks. And if you are left scratching your head as to why the bears are suddenly in complete control of the game again, join the club.
For the past three days, I've been asking my compadres in the business of managing money for their thoughts on the premise behind the current dance to the downside. Usually, the trigger for such a move is obvious. But this time, it appears that there is a handful of fears that collectively is creating a large degree of uncertainty. And with some of that uncertainty tied to big events with clear deadlines, there seems to be little reason to do any buying and at least four reasons to do some trimming/hedging of one's portfolios.
Reason 1: Politics
Feel free to label me with the Captain Obvious on this one. But the most obvious reason for the sudden urge to raise cash, take profits, and/or hedge against a BREXIT-like surprise, is the U.S. election. Last Friday's surprise by the FBI appears to have put some doubt into what, up to that point, had been a fairly certain outcome in the Presidential race. Suddenly, the talk of a landslide victory is gone and everyone everywhere is worried that Trump could actually win this thing. Heck, CNBC even had an analyst on yesterday who suggested that the Republicans could run the table on Tuesday. But wait, weren't we busy worrying that it would be a democratic sweep as recently as last week? So, the key is uncertainty reigns supreme on this topic.
Reason 2: Policy
The next issue is an oldie but a goodie - Fed Policy. While no one can be certain exactly when and/or by how much the Fed is going to hike rates, there is little doubt that Janet Yellen is indeed going to bump up the target range for the Fed Funds rate in the near future. At this point in time, the futures market puts the odds of a rate hike in December at 78%. And since this may be the most widely telegraphed move by a central bank in history, investors aren't likely to be surprised by the move.
However, it is what happens in 2017 that seems to be causing some angst. Inflation expectations are definitely picking up. The jobs market has exceeded expectations. And yet the economy isn't exactly humming along at this stage. So, while Ms. Yellen has been very good at providing transparency to this point, the outlook for what the Fed will do next is murky at best. And this, of course, creates uncertainty among investors.
Reason 3: Oil (Yes, Again)
Next up is OPEC. With oil slumping of late and a meeting of the oil cartel set for Vienna at the end of the month, uncertainty is back in the oil patch. Why should we care, you ask? In short, because the fear of contagion still lingers on this topic. Remember, it wasn't that long ago that investors feared the collapse of oil prices would trigger massive bankruptcies in the oil patch, which would spill over into related industries, which, in turn, would hurt the banks, which, of course, could be a problem for the global markets.
However, the rally in crude from mid-February through June allayed much of these concerns. The key is oil near $50 means less risk in the oil patch, which takes contagion off the table. But with recent supply data suggesting there is a global glut of crude, prices have been heading straight down since early October. And traders have noticed.
Reason 4: It's the Economy...
And finally, there is the economy. Lest we forget, the current economic recovery has been a bumpy, stop and start affair since the crisis ended in 2009. In fact, economists tell us that this has been the weakest post-war recovery on record. The bottom line is that a sub-2% growth rate does not instill the confidence needed to bid up stock prices very far - especially with traditional valuation metrics at lofty levels.
Now factor in a black swan-type of event and bam - you can make the case that a recession could be next. And we all know how stocks tend to perform when the economy is contracting.
The takeaway on this fine Friday morning is there are plenty of reasons to fret at this point in time - and very few reasons to buy stocks. Think about it; does anyone other than the speculators and/or those "betting" on the outcome of the election REALLY want to put money to work in front of next Tuesday? As such, what we're likely seeing here is more of a buyers strike and what happens when everyone wants to do the same thing at the same time (i.e. hedge portfolios) than a rush to the exits.
So, the bottom line is this. For all of those investors out there who have been looking to "buy the dip," here's your chance. Yep, that's right, THIS is the dip you've been waiting for. The only problem is it becomes awfully hard to pull the trigger in this type of environment. But, again, for dip buyers, THIS is the time to take action.
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of the Election
2. The State of Global Economies
3. The State of Global Central Bank Policies
Thought For The Day:
The simple problem of our age is how to act decisively in the absence of certainty. - Bertrand Russell
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
Investment Pros: Looking to modernize your asset allocations, add risk management to client portfolios, or outsource portfolio design? Contact Eric@SowellManagement.com
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