The stock market was ugly yesterday, with the Dow losing 317 points. To be trite, the "straw that broke the camel's back" was the news report that a major bank in Portugal had some major unexpected losses, and their stock dropped a whopping 24%. That's bad news but not necessarily big news. But, it came when the market was already nervous about Putin's intransigence over the Ukraine and the resulting damage to Europe of trade sanctions. The market was already nervous about Israel's invasion of Gaza and the possible damage to the world's energy markets. Did I mention that Argentina has clouded the whole market for international finance? Most of all, the market was nervous that the Fed was planning to hasten their withdrawal of monetary stimulus and doing so because of a good thing, i.e., the whopping 4% GDP growth rate in the second quarter. If Friday's "Jobs" Report is good, the market is afraid that report might seal the fate of monetary stimulus.
While the Fed deployed numerous tools to combat the Global Financial Crisis (GFC) of 2008/9, only two are still effective. One is quantitative easing, which has been tapering and will be ended in October. Do you remember last year's "Taper Tantrum," when the market was overly-terrified that the amount of QE each month would start decreasing. After that hissy-fit, the stock market recovered nicely and went on to record levels. The other remaining tool is extremely low interest rates. I don't think the Fed will start raising interest rates before the latter part of next year. The stock market is now afraid the Fed will raise interests rates very late this year or early next year. Once that announcement is made, I expect another hissy-fit, with the market dropping dramatically and scarily, before recovering to new record highs once again.
While the stock market is always "climbing a wall of worry," that wall is very tall at the moment. There are many reasons to be anxious right now. Unfortunately, that increases market volatility, and today's "Jobs" Report will likely cause an over-reaction or under-reaction.
Lastly, like an expectant woman waiting to deliver her baby becomes more and more anxious as the baby is later and later, the stock market averages a 10% correction every 19 months and hasn't had one for 33 months. The correction is past-term. Delivery might be induced by all this anxiety overload! I hope so, because more record highs are on the other side.
While the Fed deployed numerous tools to combat the Global Financial Crisis (GFC) of 2008/9, only two are still effective. One is quantitative easing, which has been tapering and will be ended in October. Do you remember last year's "Taper Tantrum," when the market was overly-terrified that the amount of QE each month would start decreasing. After that hissy-fit, the stock market recovered nicely and went on to record levels. The other remaining tool is extremely low interest rates. I don't think the Fed will start raising interest rates before the latter part of next year. The stock market is now afraid the Fed will raise interests rates very late this year or early next year. Once that announcement is made, I expect another hissy-fit, with the market dropping dramatically and scarily, before recovering to new record highs once again.
While the stock market is always "climbing a wall of worry," that wall is very tall at the moment. There are many reasons to be anxious right now. Unfortunately, that increases market volatility, and today's "Jobs" Report will likely cause an over-reaction or under-reaction.
Lastly, like an expectant woman waiting to deliver her baby becomes more and more anxious as the baby is later and later, the stock market averages a 10% correction every 19 months and hasn't had one for 33 months. The correction is past-term. Delivery might be induced by all this anxiety overload! I hope so, because more record highs are on the other side.
