Monday was the first day on the job for the new the Federal Reserve Chairman Jerome Powell and what a welcome he received from Wall Street. By mid-afternoon, the Dow Jones Index (DJI) plunged at one moment by almost 1,600 points. After rebounding a little by the end of business, the DJI experienced the largest daily point drop in history.
No one is arguing the significance of the negative trend which began late last week and sank further on Monday. However, contrary to what you may be hearing from the liberal media, it is far from being Armageddon. Seasoned investors not only expected the drop but also see it as a welcomed necessity to balance the skyrocketing market. One should think of it as pumping the breaks on a very fast-moving vehicle that has been speeding toward unprecedented high prices in the market.
Timing and Triggers
White House press secretary Sarah Huckabee Sanders released a statement and said, “The President’s focus is on our long-term economic fundamentals, which remain exceptionally strong, with strengthening U.S. economic growth, historically low unemployment, and increasing wages for American workers. The President’s tax cuts and regulatory reforms will further enhance the U.S. economy and continue to increase prosperity for the American people.“
The mystery with the stock market is always around timing and defining the actual triggers that cause drastic movements. Usually, the underpinning is due to negative external factors in the economy, such as the housing market in 2008. The opposite is true in the current environment where all news of the economy is positive and headed in the right direction.
Last week’s strong wage growth numbers suggested inflation that coupled with the steep rise in bond yields had a normal impact on stocks. The 10-year Treasury yield note hit 2.88% on Monday, which translates into higher borrowing costs and reduces desires for assets like stocks. For some, the big surprise was not the correction triggered by the rise in bond yields, it was how quickly it turned. It is important to note that before the recent 400-day run, it was normal for 4% to 6% corrections in the market to occur a few times a year.
Under the leadership of Janet Yellen, the Federal Reserve has been cautiously watching inflation as it slowly increased interest rates. Many believe Chairman Powell follows Yellen’s school of thought to avoid knee-jerk corrections to an overheated economy by not aggressively raising interest rates.While rates have remained incredibly low, the Fed has indicated a plan for three rate hikes this year to 2.25%. Due to the strong job numbers, investors worry that inflation might pick up even faster, forcing the Fed to raise rates to 2.5 or even 3 percent this year. Too much inflation is dangerous, and the thought of people tightening their spending habits seems to have investors behaving in a “nervous-Nellie” fashion.
Remember the stock market is a moving target and therefore what is today, may not be tomorrow. The correction which began last week is nothing short of ugly; however, many experts deem it as healthy and a long overdue. This is not an unprecedented trend, previous Federal Reserve Chairman Alan Greenspan, referencing the dot-com bubble, described it as “irrational exuberance.”
The take away here is that the run of the exceptional period of calm in the markets may be slowing and now we are heading into a more “normal” volatile environment. Simply put, the length and the size of the run-up have caused the stabilization to feel abnormal. Investors would be best served to adjust their expectations and realize that stock prices will not continue to be so ridiculously high. Not that we should have expected anything less from mainstream media, but imagine if they had covered the increase and strengthing of the market over the past year with the same vigor as they have this adjustment.