Normally stocks zoom and the bond market waffles when the Fed puts off an interest rate hike, but today we see why investment advice always contains the phrase “past results are no predictor of future earnings.” Most market elements are exactly backwards today, except bonds. Bond yields are up, as one would expect, but stock prices are down. Oil lost another 3% in early trading. There’s just bad news as far as the eye can see. Something new must be at play and that new thing is the market reacting to weakness in the Fed.
The Federal Reserve is proof that, sometimes, it’s better to be decisive and wrong than doing the right thing while appearing weak. Combined with systemic weakness in Chinese markets, a loss of faith in the Fed’s leadership pushed markets over the edge in early trading on Tuesday, with the Dow off 270 points. All 30 of the Dow Industrial stocks were in negative territory in early trading Tuesday.
Why All The Volatility?
The Dow has make a triple digit move in 19 out of the last 23 trading days. Sometimes those moves are up, but more have been to the downside. This is the longest period of extreme volatility that I have personally witnessed and even the stoutest investors find it disturbing. So don’t feel bad if you don’t like it; you’re in very good company.
It’s good to remember that our stock market woes began with an economic slowdown and stock market implosion in China. The situation in Asia is little changed, though Chinese markets seem to have stabilized a bit lately with market indexes off their lows. There’s still enough residual uncertainty about China that, combined with investors tired of the Fed’s vacillating on a quarter-point interest rate hike, to push markets lower. Investors are sending a message that they’re tired of the Fed dithering and, if they’re going to raise rates, to get on with it.
The current volatility still has plenty of room left to run and make investors nauseous with all the bouncing around. If Chinese markets continue the gentle rebound they’ve been on the last couple weeks, we could see things smooth out a bit. Normally, one should expect markets to recover after the Fed decides to leave interest rates alone, so the current dip could be considered an investor snit.
We’re also feeling some shocks from Europe, where the Fed’s interest rate dallying and Volkswagen admitting that, yeah, their diesel engines have been lying about emissions for years.
All of the clouds over the market could easily part and we could see the market rebound by year’s end. That’s the way I’m leaning right now but it’s also possible the clouds could settle in for an extended gloomy period. If I’m the weatherman looking at the market, I’d say there’s a 40% chance of continued drizzle.
What’s more certain is that, as long as fear is driving the market, there will be continued volatility. If the volatility starts leading to layoffs and consumers curtail spending, then what’s merely bad could become much worse and we really could tip over into recession. It’s probably not wise to go in big right now. The market can stay panicky longer than you can stay solvent.