WASHINGTON, August 23, 2015 – To be sure, there have been corrections in the stock market’s long bull run, dating from the absolute bear market bottom of March 2009. The most notable of these occurred in 2011. But, as most charts of stock market averages going back to 2009 amply illustrate, markets have been grinding steadily upward since the desperate financial panic of 2007-2009 was believed to have been brought under control.
At that point, a predictable and generally successful trading pattern evolved into the established rule of thumb: buy (on) the dips. In other words, whenever the market got negative for a day or three, that was the time to buy more stock since the market usually went right back up and steadily higher once the selling got out of the way. This led in the ensuing years to a certain degree of complacency, which is never a good thing when you’re dealing with that mercurial creature some old trading hands still call “Mr. Market.”
With the U.S. Federal Reserve apparently confident enough that America’s ongoing if tepid recovery had staying power, the central bank signaled in 2014 that it would be closing out its QE (quantitative easing) regimen last fall and would likely start raising interest rates—in small increments—beginning in 2015.
After a brief, nasty and reactive market crash in October 2014, the market seemed to stabilize and resume its upward march. That is, until January 2015. As we crossed into the new year, markets quietly and (to some) unexpectedly took on a cautious, rather negative tone. Part of this at least was due to fears the Fed would start hiking interest rates in the spring.
Indeed, the Fed postponed its interest rate target hike date to, perhaps, September 2015. Or December 2015. Fed Chair Janet Yellen and roughly half the Federal Reserve’s Open Market Committee (FOMC) seemed spooked by one or more economic readings at the time. This created, and continues to create, considerable uncertainty in U.S. markets, which is never a good thing.
Although political considerations prohibit honest discussions of nearly any topic in 2015 Washington, it’s increasingly clear that Yellen and at least half the Fed’s governors have quietly focused not on the official U.S. unemployment numbers—the low-average number that the Administration likes to boast about—but on the real (U-6) unemployment rate that’s remained stubbornly above 10 percent seemingly forever.
Without this considerable cadre of wage-earners returning to gainful, full-time employment, the economic and taxation train remains stuck in what still feels like first gear. Growth, such as it is, continues to be sluggish.
Publicly, at least, the Fed continues to express confidence in this ongoing “recovery.” But the Fed, much like our current, duplicitous Administration, continues to exercise a rather dishonest version of moral suasion over the public and the economy, constantly pitching to the average U.S. worker/consumer that things are getting better all the time. However, the evidence to support this is slim.
In fact, there’s plenty of anecdotal evidence the public is not buying the happy talk. Evidence? Even those who have remained gainfully employed still tend strongly to save surplus earnings rather than spend spending it as the Feds had hoped they would.
Stung badly by the Great Recession, the public’s level of trust level remains low, particularly when it comes to accumulating too much debt, given that it’s what got people in trouble the last time. Consumers aren’t consuming, and it shows in this quarter’s numbers as reported over the last few weeks by major American manufacturing and retailing corporations.
Off the radar for many, the Fed at least (if not the inattentive Obama Administration) has also been concerned about the increasingly erratic economic shenanigans currently taking place under the not so expert eyes of China’s current Communist government.
Hailed even recently as having invented a far more dynamic capitalism than the U.S. has ever seen, these Chinese miracle workers have been brought down to earth in 2015. Their manipulated currency and their badly damaged banking system have combined to cause a severe pullback in their economy and economic outlook. The current outlook is in doubt. But, given China’s huge importance to the world’s economic order, that’s not a satisfactory place to be.
The reason why is easy to understand. With mature Western economies still largely flattened by too much debt-financed socialism, many of the world’s economies have grown more sclerotic, unresponsive, and feudal. Add a severe China downturn to the equation, and it’s small wonder that virtually no one is either growing or prospering in 2015.
The Fed knows it has to raise interest rates to get the U.S. banking system and economy back to growing at a normal pace. But in 2015, something always seems to happen that understandably delays the decision to raise those rates. This week, perhaps it will be questions concerning the whereabouts of Hillary’s servers. Again.
Closer to earth, consumers aren’t buying much of anything anymore. Prices of commodities—the raw materials of agriculture and industry—have been in a protracted, deflationary slide. Deflation is what slaughtered the U.S. economy in the 1930s, resulting in the Great Depression. The Fed no doubt fears that increasing borrowing costs by inching interest rates up at a time like this risks kicking off an instant replay of that era.
In other words, the Fed in 2015 is Prince Hamlet of Denmark. To raise or not to raise. That is the question. Markets hate indecision, though, and we have only just begun to see the result of the Federal Reserve’s lack of clarity. Money, or what’s now left of it, began to take a long hike last week back to the safety of AAA bonds and U.S. Treasurys. Many professionals fear this is just the start of a major retrenchment that will find government instruments replacing stocks in a great many portfolios, which is far from what the Fed had in mind when they started QE 1 many fiscal years ago.
Read also: Another Black Monday for Wall Street?
The whole confusing mess is exactly what led to the stock market’s Super Slam last week, a horrific, grinding crash that unfortunately may continue in the week ahead.
The Dow Jones Industrials closed off a whopping 530 points Friday, and the broader-based S&P 500 lost almost 6 percent last week, its worst one-week drop since the last one back in 2011. As many pundits are quick to point out, we’re now firmly in “correction” territory, with the S&P 500 now off a full 10 percent from its earlier-year high. So what happens next?
Next: A look at more charts and a crystal ball gaze at the week to come.