WASHINGTON. Things looked great Monday morning on Wall Street. Stocks advanced sharply at the ringing of the opening bell. But a bit later Monday morning, with nary a hint of warning, virtually the entire universe of stocks freaked out. Monday market madness ensued. It’s as if stocks unanimously decided to take a header. And BANG! The widely followed Dow Jones Industrials were down 200, 300, 400 points or more in a flash.
After a bullish start, how did we manage to get hit by Monday market madness?
Roughly mid-morning, ZeroHedge took a stab at why the bottom suddenly fell out of Wall Street’s latest run of irrational exuberance. But inadvertently, the Tylers may have found the answer anyway.
“No real catalyst for the sudden drop in stocks – weak construction spending hit after the drop had begun – but the surge open in futures overnight has been erased since the cash open this morning…”
Here’s the ZeroHedge chart. It’s bad enough. But the site actually posted the chart before things really got sickening.
Elsewhere, ZH acknowledged that those construction numbers, reported mid-morning, seem to have knocked the props out from underneath the bull argument.
“U.S. construction spending posted the smallest annual increase since 2011 as homebuilding slowed amid higher borrowing costs and a glut of apartments in some areas.”
US China trade speculation piles on
“Stocks staged a marked turnaround Monday as the S&P 500 sank back below a key chart level and a trade resolution between the U.S. and China had long been expected by traders.
“The S&P 500 was down 1 percent after climbing nearly half a percent, breaking back below the key 2,800 level and on pace for its biggest drop since Jan. 22. The broad index closed above 2,800 on Friday, marking its highest close since Nov. 8.
“The Dow Jones Industrial Average fell 348 points, erasing a 129.66-point gain. Boeing was one of the worst performers in the Dow, sliding 3 percent. The Nasdaq Composite traded 0.8 percent lower. Earlier in the day, it was up as much as 0.64 percent.
Stock market overbought?
“‘The market on all technical levels was the most overbought we’ve been’ in a while, said Larry Benedict, founder of The Opportunistic Trader. ‘The market is just overextended.’
“‘You’re also going to start seeing some skepticism on the China front,’ Benedict said. ‘Everybody thinks this is a done deal. I don’t know how easy it’s going to be.’”
Benedict is right. To a point. Anyone who’s invested in stocks for a reasonable period of time knows that they must reckon with cosmic things like political risk nearly all the time. That’s particularly true when international trade issues are on the table.
We think it’s the housing numbers that really spooked the market today. We’ve seen little if any improvement in them since last fall when the market decided to take a header that proved an order of magnitude worse than today’s. At least at the moment.
The Fed’s interest rate nonsense still hurts the market, though they claim to have stopped. For now.
Then again, it all goes back to the Federal Reserve’s own version of irrational exuberance. The nation’s central bank must have figured we’d already recovered as far as we could recover from the Great Recession market bottom. (That, by the way, occurred 10 years ago this week, a weird coincidence if you think about it.)
So, lacking much if any evidence the economy was overheating and driving higher-than-acceptable (2 percent) inflation, they figured they could just keep hiking interest rates ad infinitum back to where they were circa 2007. And, in the meantime, keep up their fearsomely steady “balance sheet reduction” exercise. Which meant dumping billions of $$ Fed bond holdings out into the open market, drastically lowering their still substantial holdings.
Unfortunately, this double whammy – hiking interest rates every quarter, plus selling bond inventory, thus pulling money OUT of circulation – had immediate and disastrous consequences on both housing and stocks. And it’s the gift that keeps on giving.
Lousy housing numbers = drooping economy
New home sales virtually shut down last fall and have yet to recover. And the primary reason was that a welcome, modest wave of new homebuyers were priced right out of the market by those never-ending interest rate hikes, which made mortgages just too costly. A major part of the US economy suddenly came to a standstill. Just, of course, when the middle-class was trying to re-create itself after 8 years of Obamanation stagnation.
So today’s news on housing wasn’t exactly a surprise. It’s been same old, same old until last fall. Worse, although the Fed has also talked a good game of tapering off its deflationary bond dumping game, they’re currently selling off bond inventory as fast as they were last fall. These folks are fast coming to resemble The Gang That Couldn’t Shoot Straight.
Stocks are trying to recover
At the moment, Monday market madness is subsiding. Somewhat. As a result, the market scorecard is improving. Somewhat. The Dow is off “only” 220 points as of 2:30 p.m. ET, a loss of roughly 0.88 percent. The NASDAQ and the S&P 500 have incurred less damage, with the former down roughly 0.45 percent and the latter off by nearly 0.6 percent.
But on a day like this, the bears and the shorts are increasing the body count of last week’s sleeping bulls. This market, as much as we’ve been enjoying the recent action, was about due for at least a mildly corrective smackdown. So we don’t expect to end in green ink at the 4 p.m. closing bell.
We could, in fact, be facing a rough week this week. But perhaps that’s needed to stabilize stocks after the current bout of irrational bullish exuberance.
But maybe the Deep State’s election year recession desire isn’t helping Mr. Market
Worse, we’re increasingly convinced that mysterious forces really do want to get a recession going as Election 2020 fast approaches. It would be another way to #Resist President Trump. That’s a renewed effort the truly whackjob Democrat House is already looking to launch on any number of fronts.
But, like the Fed interest rate hikes and bond dumping, Chaos in the Washington Swamp also makes nervous investors prone to sell and stuff excess cash in their mattresses. Too much of this, and you’ve conjured up a real recession for yourself.
We live in truly weird and phenomenally irrational times. If today’s Monday market madness begins to look like a trend, we will likely take the profits we’ve made since January 1, 2019 off the table for now, rather than ride this puppy all the way down like we did last fall. We don’t think this will happen. But with so many jackasses in charge of so many key elements of our economy, we can never rule out a big, nasty, negative outcome.
Back tomorrow with, hopefully, more statistics we can work with.
— Headline image: Wile E. Coyote swinging on a bungee cord, just like the stock market. (Screen grab of (c) Warner Bros. cartoon, via YouTube. Fair use to illustrate current financial situation.)