This week global equities markets plunged, following U.S. equities which continued their slide from last week.
This week’s decline in the U.S. was over 5% putting markets into official correction territory.
As I said last week…
Newton is back with a vengeance, and he is still upset that any market players would doubt his theories on the laws of gravity!
The concoction of already rising rates, high valuations, extreme complacency, and unease on Capital Hill morphed into extreme fear and precipitous declines.
To make matters worse, a meltdown in short volatility derivatives added to the mayhem by creating margin calls and forced selling of equities to hedge derivatives gone wild!
Fortunately, with just hours left in the week….
Some magical buying appeared late Friday around the 200-day moving average created a 4% rally off the intra-day lows.
Rising rates was already a ‘concern’ at the end of 2017, but they didn’t seem to be a problem during January’s run-up that had earmarks of the start of a parabolic move higher.
Perhaps it was the market’s myopic focus on the anticipated tax overhaul along with a simultaneous blind spot for unintended consequences (potentially huge growth in the deficit), that enabled January’s big run-up in equities.
That would explain why the reality of the Trump tax cuts hit the market squarely in the jaw when the government shutdown over the budget became the focus again this week.
Market’s are good at reminding investors to “be careful for what you wish for”.
What’s The Concern?
Rates have risen sharply and currently sit on the verge on reversing a 30-year downtrend! See FRED chart below.
Our governments needs to borrow and roll over even more money on a short-term basis, and it’s scary.
China is holds a trillion or more of our debt, and they’re not the only ‘foreigners’ we depend on to buy our debt as you can see by the chart below.
So, if things get out of control on the diplomatic front they could decide to buy Bitcoin instead.
During this selloff, the strongest sectors were retail and regional banks, but beware…
Reginal Banks love the margins that higher rates allow, but it’s really not consistent with strong retail because higher rates lead to higher rates on consumer credit cards.
Don’t Try To Predict The Market Based On All Of The Above because…
The key factors to watch are the market internals.
Currently they are showing very oversold levels, but…
For the complete story go to the video below