Stocks Crash! Or Maybe Not
Sunday, 1/30/2022 09:01
Fed to the rescue seems to be the guess...
The STAIRS UP and the elevator down,
writes Brian Maher at The Daily Reckoning.
Here you have the stock market's general rate of travel, depending upon its direction of travel.
The stock market has lately made tremendous speed – downward.
It has been imprisoned within a plunging elevator car, stark with terror, abandoned to the mercies of merciless gravity.
The S&P 500 and Nasdaq Composite have been jammed into the identical elevator, enduring identical horrors.
The S&P quit the stairs on Jan. 4, at the level of 4,818.
Into the elevator car it went.
But precisely like the other major indexes, the Nasdaq has also enjoyed a couple of good haulings back upwards, none more dramatic than last Monday.
What's happening? Explains CNBC:
"Though some areas of the market considered more expensive or speculative began to struggle in November, the broader market took a big step back during the first week of January following increasing hints from the Federal Reserve that the central bank will take aggressive action to slow down the jump in consumer prices..."The central bank has signaled that it plans to stop its asset purchases, hike rates and possibly reduce its balance sheet, starting in March. Government bond yields have surged in preparation for the rate increases, with the US 10-year Treasury rising more than 40 basis points this year alone..."
Yet why did Meta, Amazon and Microsoft close higher after losing to gravity much of the day? Why the late jumps? Why the nearly 1,100-point swing of the Dow Jones?
We have rarely witnessed such a violent market schizophrenia within such a tight stretch.
Did the fears besieging markets for the past weeks scatter suddenly late one afternoon?
We can discern little reason why they would.
Experts would have us believe investors simply bought "the dip" late this afternoon.
J.P.Morgan's Marko Kolanovic:
"The recent pullback in risk assets appears overdone, and a combination of technical indicators approaching oversold territory and sentiment turning bearish suggest we could be in the final stages of this correction."
Just so. Yet this lovely theory leaves us far from convinced.
Did investors discover the technical indicators only late in the day last Monday? We hazard markets were "oversold" throughout the morning and much of the afternoon.
Perhaps the algorithms initiated stock purchases once markets approached a particular floor.
Yet perhaps Mr.Kolanovic gives another clue, an unintentioned clue:
"While the market struggles to digest the rotation forced on it by rising rates...in a worst-case scenario we could see a return of the 'Fed put'."
Perhaps markets decided the Federal Reserve will ride heroically to their rescue. It has proven a safe wager in the past.
Perhaps, even, someone within the Federal Reserve whispered into someone's ear that its asset purchases will continue – that it will repair the elevator before the plummets continue.
We have no answer of course. Perhaps – unlikely though it is – the experts are correct.
Markets are oversold and investors sniffed opportunity.
We extended a line to our colleague Dave Gonigam of The 5 Min Forecast. Perhaps his spies had reported rumors, we wondered. They did not.
Mr.Gonigam could only raise his arms up into the air...and sigh: "Nothing is rational anymore."
We have arrived at the identical conclusion. Nothing is rational anymore – nor has anything been rational for years and years.
For years the Federal Reserve twisted the road signs on the road to price discovery. East is west, west is east. North is south and south is north.
Or is north west? Is west south? No one can say.
The Federal Reserve has blocked off every southbound lane...and detoured all traffic into one single lane heading north.
Or to return to our elevator analogy: The Federal Reserve has kept the elevator car ranging between the upper floors.
Yet it now has a burgeoning inflation on its hands. It must tighten monetary policy in order to scotch it.
Yet those trapped in the elevator car require monetary easiness.
The one question then remains: Will the Federal Reserve let the elevator go crashing to the ground?
Email us