December 7, 5:00 pm EST
Last year, the stock market broke a 21-year old record of the most consecutive days without a 3% intraday drawdown — some 240+ straight days.
We’ve now had a 3% intraday drawdown (open to low) three times since just early October.
So, what is responsible for the rise in volatility? Why such a contrast from last year?
It’s regime change. After nine years of zero interest rates and trillions of dollars of QE, the torch was passed this year. We entered the year with big tax cuts to implement.
This was the official transition from a monetary policy-driven economic recovery, to a fiscal stimulus-driven recovery. The Fed passed the economic stimulus torch to the White House.
Now, there was good reason that volatility remained subdued under the Fed’s emergency level zero-interest-rate policy. Why? The Fed told us, explicitly, that they (and other major global central banks) stood “ready to act” against any potential shocks that could disrupt the global economic recovery. That was an explicit promise to absorb risks so that investors (businesses, consumers, etc) would keep economic activity moving, by spending, hiring and investing.
The Fed (and other central banks, namely the ECB) had to be the backstop, so that people would pursue higher risk/return assets, in a world where risk-free assets yielded nothing. That was good enough to secure an economic recovery, but only at stall-speed levels of growth.
With that, as we entered the year, the U.S. economy was, for the first time in more than nine years, removing the central bank backstop (removing the life support for the economy). The gameplan: To replace low interest rates and QE with a $1.5 trillion fiscal stimulus package to catapult the economy out of the economic rut of 1% growth, and back toward sustainable 3% (trend) growth. And with that influence, the economy might have a chance to sustainably mend and breath on its own again.
So far we’ve gotten the growth (whether or not it’s sustainable has yet to be seen). But this regime change has also introduced uncertainty (and shock risks) back into the economy and markets. That resets the scale on volatility. And I think that adjustment has been underway.
With that said, the pendulum often swings a little too far in the opposite direction at first (from little-to-no volatility to a lot, in this case).
What stocks do you buy? Join me here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
November 27, 5:00 pm EST
Earlier this month, we talked about the big fall in oil prices.
If we look back over the past five years, the magnitude of that move is only matched (or exceeded) in cases where there was significant manipulation in the oil market and/or a systemically threatening oil price crash.
As we’ve discussed, the pressure on oil this time around seems to be about manipulation — and appears to have everything to do with Trump’s leverage over the Saudis (related to sanctioning the Kingdom over the Khashoggi murder).
But we’ve now traded down to the important $50 mark. That’s 35% from the highs of just October 3. And this is an inflection point where it could go bad, but it also could present a goldilocks scenario (a level that’s just right for the U.S. economy).
Sure, cheap oil is good for consumers. You save a few extra bucks at the pump. But in the current environment, it presents risks to the financial system. The shale industry’s break-even point on producing oil is said to be $50. Below that, they dial down production, lay off workers, stop investing and quickly become a default risk to their creditors (U.S. and global banks). We saw it back in 2016. The same can be said for those countries heavily dependent on oil revenues (i.e. they become default risks as oil prices move lower).
That’s the bad side. The good side to the oil price slide? As we’ve discussed, it should relieve some pressure on the Fed. The Fed likes totalk about their inflation readings excluding effects of volatile oil prices. But they have a record of acting on monetary policy when oil is moving.
The bottom line: Oil plays a big role in their view on inflation. And given the quick drop in oil prices, the Fed’s concerns about inflation should be cooling. Again, this opens up the door for the Fed Chair, tomorrow, to take the opportunity in a prepared speech at the Economic Club of New York, to signal a pause coming in the Fed’s rate normalization program. That would be a positive catalyst for economic and market confidence.
What stocks do you buy? Join me
here to get my curated portfolio of 20 stocks that I think can do multiples of what broader stocks do, coming out of this market correction environment.
November 12, 5:00 pm EST
Stocks continue to swing around following last weeks midterm elections. Perhaps it has something to do with the uncertain outcome that remains in Florida, given the role Florida will play in the 2020 Presidential election. Perhaps it has something to do with the continuation of the unraveling of the tech giants.
Maybe more importantly, we head into a week with key inflation data hitting for the U.S., Europe and the UK. And we have Q3 GDP numbers coming from Japan and Europe. The Japanese economy is expected to have contracted last quarter.
Slowing numbers in Japan and Europe, along with some tame inflation data might give the Fed Chair (Powell) an excuse to dial down expectations of a December Fed hike. He is scheduled to speak Wednesday afternoon at a Dallas Fed event.
With the idea that the new divided Congress will put the brakes on any new pro-growth economic policies, Powell may be looking for the excuse to slow the pace that rates are rising. That would be a huge catalyst for stocks.
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November 6, 5:00 pm EST
In my note yesterday, we talked about the probable outcomes for the elections.
Whether we see the Republican’s retain control of the house, or lose it, both scenarios should be a greenlight for stocks.
Why? Because the cloud of uncertainty will be lifted. Even if we were to have gridlock in Washington, from here forward, the economy has strong momentum already, and the benefits of fiscal stimulus and deregulation are still working through the system.
Now, given today’s midterm elections are feeling a bit like the Presidential election of 2016 (as a referendum on Trump, this time), I want to revisit my note from election day on November 8, 2016.
As I said at that time, central banks had been responsible for the global economic recovery of the prior nine years, and for creating and maintaining relative economic stability. And creating the incentives to push money into the stock market (i.e. push stocks higher) played a big role in the coordinated strategies of the world’s biggest central banks. With that, I said “neither the economic recovery, nor the stock market recovery can be credited much to politicians. In this environment, in the long run, the value of the new President for stocks will prove out only if there’s structural change. And structural change can only come when the economy is strong enough to withstand the pain. And getting the economy to that point will likely only come from some big and successfully executed fiscal stimulus.”
It turns out, Trump has indeed executed on fiscal stimulus. And he’s gone aggressively after structural change too (perhaps too early, and with some success, but at a price he may pay for politically). Still, he’s been able to execute ONLY because he’s had an aligned Congress.
Importantly, the economic policies out of Washington have allowed the Fed to bow-out of the game of providing life support to an economy that was nearly killed by the financial crisis. That’s good!
