RWR - The Stock Market Sell-Off Has Started Where Could It Get To?
2023-08-08 06:44:00 ET
Summary
- It looks like the overly anticipated intermediate-term stock market correction may have started right on schedule in the seasonally questionable August time period, when trading tends to be thin, and the market is easier to move one way or the other.
- Seasonally speaking, August is not that great while September is even worse, despite October having the worst reputation.
- The Fed needs to look at themselves and the $6 trillion in COVID deficit spending in 2020-2021 that they helped monetize.
It looks like the overly anticipated intermediate-term stock market correction may have started right on schedule in the seasonally questionable August time period, when trading tends to be thin, and the market is easier to move one way or the other. Seasonally speaking, August is not that great while September is even worse, despite October having the worst reputation.
How do we know this is just a correction and not the start of anything bigger? Simply put, we don’t; but the economy and the stock market have been surprising to the upside this year, so we will give them the benefit of the doubt. A good target is the 50-day moving average (the red line, below) while a possible target, even though a lower probability one, is the 200-day moving average (blue line, below).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
What could trigger the bigger correction? An unforeseen event. We didn’t know the big bank failures would happen in March and they undercut the 200-day moving average, despite a strong start to the year. Another such disruption could cause the same effect. I can think of several other factors – like hostilities in Ukraine spiraling out of control, or a sharp move in Japanese interest rates and the yen, messing up multiple carry trades, or an overshoot by the Fed that causes U.S. economic numbers to deteriorate.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
U.S. interest rates have been moving up notably in the past three months, and the stock market has just started to notice. Previously, in 2022, when the 10-year yield was under upside pressure, we had notable underperformance in NASDAQ, which started to get less severe as the 10-year rate hit its intraday high of 4.33% in October 2022. Well, we rose over 4.20% on Friday after a good but not hot employment report.
I cannot envision a scenario where the stock market would cheer a move of the 10-year rate back above its multi-year high of 4.33%. I thought 4.33% would be the high mark for this cycle. Now that we are just 13 basis points away from it, as of Friday’s intraday peak, that is a good reason to reexamine that view.
The Great Housing Puzzle
Waiting for housing prices to correct – partly because mortgage rates are higher – has been an exercise in futility. It’s way more complicated than people being locked in at lower 2.5% to 3.5% fixed-rate mortgages and not wanting to move, hence the low inventory of homes on the market. That’s part of it, but the bigger issue is that the housing bubble and bust in the 2000s left home builders shell-shocked and they simply built far fewer homes than the normal rate of household creation in the U.S. since 2009.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Some estimates place the total shortage of homes in the 3-5 million range, which is not a small amount. What we are left with is less inventory of homes compared to previous hot housing markets, despite the 30-year fixed mortgage rate having more than doubled off its lows in late 2020.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
That the housing market is strong is also due to the 3.5% unemployment and general shortage of workers in an economy that is still expanding. Yes, the labor force participation rate is rising but it is not yet back to pre-pandemic levels. I do not believe that the labor market caused the inflation issue in the U.S., so the Fed looking to the labor market for excuses on inflation is the wrong place to look.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The Fed needs to look at themselves and the $6 trillion in COVID deficit spending in 2020-2021 that they helped monetize. A Bernanke type of QE didn’t monetize out-of-control deficit spending, even though we did have record deficits in the first term of the Obama years. Powell’s type of QE was much bigger in size and much faster, and the deficits in his years were 3-4 times Obama’s in a single year.
When the government shoves that much money into an economy that is malfunctioning due to stopped-up supply chains, I am surprised that the inflation rate only got as high as 9%.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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The Stock Market Sell-Off Has Started, Where Could It Get To?