WASHINGTON. What started out last week as another promising bull market advance in stock prices ended up as a bearish rout by Friday afternoon’s 4 p.m. ET closing bell. Having enjoyed an exhilarating rally Thursday, shocked Wall Street bulls ran into a Bloody Friday massacre of considerable force. It was like stocks were riding a huge bungee jump gone bad. Because the bungee cord snapped on its first bounce rather than on the initial drop.
Just check out the last three days of market action in the Dow Jones Industrial Average (DJIA), which you can view in the final three bars at the right of the following chart.
To recap Wall Street’s Bloody Friday massacre
Markets traded near their yearly highs with a sense of cautious optimism in the week just ended, as traders cautiously anticipated the latest reading of the Federal Reserve tea leaves. Wednesday afternoon, the Fed encouraged investors’ bullish hopes. Among other comments, the FOMC essentially admitted they’d overdone the interest rate thing last fall and would likely not do that again in 2016.
Stocks swooned slightly after the Wednesday report. They partied hard to the upside Thursday. But then, virtually without warning, the bears suddenly rode in to slaughter the previously happy bulls. That soon resulted in a truly horrific and widespread Bloody Friday massacre in virtually all market sectors.
The sheer viciousness of it all made investors wonder if Part II of 2018’s Q4 profit-busting massacre had suddenly commenced.
Check out the big jump in market volatility Friday as measured by the widely accepted VIX volatility index. That may not bode well for Wall Street bulls.
Another view of last week’s Epic Wall Street Fail
Don’t believe us about this Bloody Friday massacre? Here’s how Lance Roberts, writing for Real Investment Advice, characterized the week just ended.
“The volatility in the markets continued this week with another big whipsaw for investors following the Fed meeting. On Thursday, the S&P soared after the Fed announced they would not be hiking rates this year and ending their balance sheet reduction by September. On Friday, the rally was reversed as the realization of what the Fed actually said sank into the markets.
“In just the course of 4-weeks, the market has swung from overbought, to oversold, back to overbought and then begin correcting back to oversold on Friday. I am exhausted just writing about it.”
We ourselves were exhausted trying to rescue our portfolios, dumping several marginal positions. These sales mostly resulted in profits. But some of those profits were significantly less than they would have been had we taken them on that bullish Thursday.
What happens next in this bungee jumping stock market?
Objectively speaking, regarding the overall economy, we have five key observations.
Observation 1: The economy in 2019 will seem to slow.
The US economy, as the Fed infers, is still relatively solid. But it’s also somewhat weaker than the Fed admits, due largely to their overreach on interest rate hikes in a non-inflationary 2018 environment.
Observation 2: A slowdown in 2019 profitability is natural, given the GOP Tax Cut-induced jolt to 2018 corporate numbers.
As we have observed several times in these columns, while business in general should still be robust in 2019, it won’t come close to topping 2018 profits. The reason why is simple. The stunningly effective GOP corporate and individual tax cuts and President Trump’s ruthless rule-cutting regime combined to cause a massive increase in corporate growth and profitability. Even if businesses do just as well in 2019, they won’t match last year’s numbers. That’s because the tax cuts and regulation cuts are now built in. You can’t, therefore, attributing these lower numbers as “slowing growth.” They’re simply the result of a new normal. Wall Street bulls might try to understand this before they sell.
Observation 3: Economic slowdown or recession: Pick only one.
The Fed may very well have succeeded in heading off an actual recession in the US economy. But it’s already clear that their clockwork rate hikes have damaged last year’s boom. Worse, this happened as the middle-class finally had the opportunity to escape from the worst of the Great Recession problems, including over-indebtedness. Scare them again with interest rate overkill, and they’ll stuff any excess cash back into their mattresses rather than investing that cash. Small investors have a hard time forgetting things like last week’s Bloody Friday massacre.
Observation 4: Overly eager interest rate hikes the middle class and Wall Street bulls scurrying for cover.
The Fed’s decision to put rate hikes on hold, probably for most or all of 2019 was the right decision. But it may have come a bit late in the game – too late to prevent at least a slowdown in this year’s economy. That was an unnecessary outcome, but we’ll likely need to live through it. The corporate bigwigs got all our most of their money back after the Great Recession. Why is it so bad when the beleaguered middle class has a chance to do the same?
Observation 5: International trade issues still cast a shadow.
If Congress doesn’t pass President Trump’s NAFTA successor and if Trump can’t get a decent deal soon from Beijing’s Communist government, the US and the world economies will pay an increasingly high price. And investors and even Wall Street bulls are well aware of these ticking economic time bombs. We’ve seen far worse things than last week’s Bloody Friday massacre. But that’s no excuse not to prepare for such an event.
Next: How do we save our portfolios if the worst comes to pass?
– Headline image: Bungee jumping from Nevis Bungee Platform near Queenstown, NZ.
(Image via Wikipedia article on bungee jumping, CC 3.0 unported license.)