State of the Stock Market Analysis for the Week Ending on February 11, 2018 One of the Toughest Weeks Ends Somewhat Positive 2-11-18)
This was one of the toughest weeks we have seen for the stock market in a long time. The 1,000-point daily declines in the Dow Jones Industrial Average have a way of rattling investors, but Friday’s bounce was a good sign. The major indices were up about 1.4% each on Friday alone, which helped us end the week on a positive note. The majors still had some bad numbers for the week, though, as the Dow lost 5.2%, the Nasdaq lost 5.1%, and the S%P 500 lost 5.1%. The last thing the bullish camp wanted to see was a Friday meltdown, and we somehow avoided that scenario. That sets us up for a Monday bounce, so we will see what happens.
The yield on the 10-year U.S. Treasury closed out the week at 2.83%, which was a high level, but at least it did not spike. Long rates are in the spotlight, and that will likely remain key as we head into a February that feels a lot like a traditional October. The Volatility Index (VIX) closed out at 29.06, which is high, but it helped calm investor fear levels a bit. Monday’s action will be extremely important, but at least we did not go into the weekend with a big Friday selloff. Bulls are looking for this bounce to follow through and reverse the downturn, but there are still structural and technical factors that need to be addressed.
The big challenge for the stock market right now is to “go it alone.” We have had eight-plus years of Quantitative Easing (QE) and help from the Federal Reserve, and the stock market has depended upon it. The 2008 collapse we saw created a Fed that stepped in and helped in any way it could, and it worked well. Zero interest rate policies (ZIRP) helped the housing market and the stock market rebound, but we seem to be entering a new stage where a strong economy is indicating that higher interest rates are on the way. The Federal Reserve has wanted to “normalize” interest rates, but normalizing interest rates is not an easy task.
Central banks around the world and the Federal Reserve embarked on something that had never been done. Critics have said that simply buying bonds and everything else was dangerous and unsustainable, but oddly enough it worked. A 10% correction in the stock market used to be “normal,” but after eight-plus years of a rising stock market, “normal” corrections are not the “new normal.” Maybe a “new normal” is on the way, but it is still rough to see the Dow move 1,000 points in a day. It has been a long time since we have seen the stock market so volatile, but that is what the stock market historically has done.
The buzz is that ETFs and derivatives have helped add to this current mix, and that is probably true. We can always count on Wall Street to create products that baffle the mind. The blow-ups we saw in the past couple weeks in volatility-related funds are a great reminder that if investors want to gamble, there is always a way to do so. Warren Buffett used to say that “derivatives” were sort of like Hell. They are easy to get into, but hard to get out of. The Oracle of Omaha has great insight, and his warnings about complex economic instruments stand strong in this current investment environment.
The brief and reasonably small market meltdown was probably needed and necessary, but it might be driven by the meltdown in “side bets” that went wrong. Margin calls come in, and hedge funds are forced to come up with money or cash in a big way. This might be forcing selling in stable companies like Warren Buffett’s Coca-Cola (KO), which is otherwise a stable, boring company. It is not that some hedge funds want to sell, but rather that they have to sell. We are not out of the woods yet, and the liquidation and selling will likely continue. This process will likely continue in the next few weeks so keep those seat belts fastened tightly. The Gorilla wishes each and all a relaxing weekend, and we will be back in action on Monday.
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