*Currency markets trade 24 hours, the figures here indicate currency pair movements between 9am and 4pm ET Image courtesy: Museum of American Finance, New York City #1 Capitulation!
There is no other word for it, although I'm sure investors watching today's market massacre can think of a few choice ones of their own. Today's sell-off, which really accelerated in the last hour of trading wiped out any gain the DJIA made this year. The Nasdaq, which was the poster-child for the go-go growth days of the Spring of 2018, fell nearly 4 and a half percent, and is down over 12 percent from its closing high on August 29th and officially in a correction. The S&P 500 is down 9.34 percent from its closing high, teetering very close to a correction of its own.
Lower highs and lower lows. That's the market phase we are in right now. The DJIA will drop 2 percent one day, then climb back 1 percent the next, only to drop 1.5 percent the following day. The sentiment has soured and it's unclear what will be the catalyst to turn sellers into buyers. It is the autumn of our discontent, unless you are a short-seller. If you are, you are buying drinks tonight.
There were other factors at play today - namely mail bombs showing up at CNN in New York and at the homes of major political figures. It's a tense time, and anxiety is sky-high.
But… let's keep things in perspective - historical perspective.
Imagine walking into work 89 years ago today and hearing (via the Newsies) that the Dow Jones Industrial Average was in an 11 percent free-fall. That's exactly what happened on Black Thursday, October 24th, 1929. That crash followed a 4.5 percent decline the prior day.
Here's an excerpt from our article on Black Thursday:
"The stock market had already fallen off nearly 20 percent since its record close (at the time) of 381.2 on September 3, 1929. Even worse, trading volume was 12.9 million shares – three times normal volume. The three leading banks at that time were Morgan Bank, Chase National Bank and National City Bank of New York. They bought stocks to restore confidence in the markets. The Dow recovered a bit, closing 2 percent down, at 299.47. On Friday, the Dow closed higher, at 301.22. However, on Black Monday, it fell in light trading, to 260.64, which triggered an all-out panic on Black Tuesday. By the end of the day, the Dow had fallen to 230.07, another 12 percent loss.
After the crash, the Dow continued sliding for three more years, bottoming out on July 8, 1932 at 41.22. The Dow lost almost 90 percent of its value since its high on September 3, 1929. In fact, it didn't reach that high again for 25 years, until November 23, 1954."
Why it Matters: There's a saying that history has a way of repeating itself. For some things, that may be true, but it doesn't work that way in the investing world, necessarily. Yes, there are observable patterns one can point to if one is trying to draw a comparison, but every era is unique. Technological changes in trading and investing have brought algorithmic trading into the mix which triggers automatic buying and selling if markets or securities behave a certain way. There are more passive investment vehicles like ETFs and other ETPs that have opened the market to new participants and offered institutions options for hedging their positions. You just can't equate investing in 2018 to investing in 2008, 1988, or 1929, for that matter. The one thing that is constant, however, is investor sentiment. Sentiment was bad going into Black Thursday 1929, and it stayed that way through a violent market crash, a profound economic downturn and ultimately The Great Depression.
We are not in a recession, or even close to one. The Leading Economic Indicators are strong, unemployment is at historic lows, and economic growth is robust. That doesn't mean we won't have one. The technical definition of a recession is two consecutive quarters of negative economic growth. The National Bureau of Economic Research (NBER) tracks all recessions and usually lets us know when we are in one, and precisely when we have emerged from one. Don't worry - we'll let you know if we are getting close. We are not.
Volatility in the markets, corrections, and even crashes, do not always precipitate recessions. Far from it. According to Ben Carlson, who pens the 'A Wealth of Common Sense' blog, 66 percent of market sell-offs occurred outside of a recession.
The stock market and the economy are not one in the same. The economy might influence the stock market, but never forget that they are different organisms.
Lastly, we forget that market performance is akin to a coin flip. Since 1990 stocks rose 53.4 percent of the time and fell 46.6 percent of the time. Michael Batnick, Ben's podcast partner and author of The Irrelevant Investor, does the math:
"From 1990-today, the average return during days when the market rose was 0.73%. The average return for days when the market fell was -0.76%. Over that time period the market rising or falling during any given day was basically a coin flip, with stocks rising 53.4% of the time and falling 46.6% of the time. But over this 29 year period, there were 500 more up days than down days, which was enough to produce a 669% gain for the index (without dividends)."
What's Next: This was supposed to be an earnings season for the ages. Companies are flush with cash (by and large), tax breaks are coming their way and the consumer is in relatively good shape. But companies that miss forecasts or guide to slowdowns in the coming quarters are getting crushed by investors poised to sell at the slightest whiff of bad news. See AT&T today, down nearly 8 percent . Netflix was down 8 percent, even before it reported its quarterly results ten days ago. There is simply no place to hide when sellers take the wheel, and right now, they own the road. Verizon may be the exception -- which is why it is our Chart of the Day, below.
As Jeffrey Kleintop, Chief Global Investment Strategist at Schwab puts it, investors have been net sellers of stocks in the second half of the year, selling just about everything. Here is his chart with data from the Investment Company Institute. Note that this has happened before, as recently as 2015, but that doesn't mean history will repeat itself.  Chart of the Day: Verizon shoots to new highs as market falls
Our friends at All Star Charts had some rare good news amid this battered market. Verizon was one of only a small handful of NYSE-listed stocks making new 52-week highs today. In contrast, hundreds of NYSE stocks were making new 52-week lows. Here's an excerpt of ASC's chart analysis:
"The new 52-week high list has been pretty scarce as of late, but Verizon Communications Inc.'s (VZ) earnings announcement propelled its stock above an important level of resistance to 17-year highs, signaling that further upside may be ahead.
Below is the daily chart of Verizon, showing a choppy five-year range in the stock between $42 and $56. Prices have been flagging tightly at the top of this range for the better part of three months and have now gapped up and closed above the 2016 highs at $56.50. With momentum in a bullish range and the 200-day moving average rising, the positioning of this gap suggests that it is a breakaway gap and that a new uptrend is beginning."  CONNECT WITH INVESTOPEDIA |
No comments:
Post a Comment