Global Money Trends

Staying on Top of Volatile Global Markets

Dow goes Parabolic, Soars above 22,500-level- shrugs off hawkish Fed

Oct 02, 2017

     Retail investors who’ve been waiting for stock prices to go “on sale” before buying have a problem: The benchmark S&P-500 index <SPX> hasn’t suffered a decline of -3% or more for nearly 11-months, the 2nd longest run in history. It’s been the calmest and least volatile year in Wall Street’s history. The cost of purchasing insurance against a general market decline, – the Volatility Index (VIX) ended the month of September at 9.51, its lowest monthly close in history.

     There have been no Bargain hunting opportunities. That’s created a dilemma for anyone trying to “buy on the dips.” In fact, waiting for a -3% pullback has caused many investors to miss out on the S&P’s +14% gains and the Nasdaq’s +24% gains, so far this year.

     “Buy The Dip? What Dip?” The S&P-500 <SPX> index has notched 38 record highs this year. It’s gone 228 trading days without suffering a -3% pullback, the second-longest stretch since 1950 and longest since 1995-1996. The large-company stock index hasn’t suffered a “pullback,” or decline of -5% or more, for 15-months, when Britain surprised investors by voting to exit the European Union. You have to go back to the early-year selloff in 2016 for the market’s last official correction, or 10%-plus plunge.

      While this type of parabolic surge is great news for investors already in the market, and are now ready for early retirement, it has caused hesitation for investors that are looking to get in – out of fear of buying at a top.  The “absence of pullbacks” is perhaps the biggest story of the year. Pullbacks, history shows, are normal, common occurrences. Since 1950, the S&P-500 index has suffered declines of -3% or more; 4.3-times per year, on average, and -5% pullbacks at a rate of 2.5-times per year. But there have been none so far this year, the biggest draw down was a -2.8% decline.  

      Some traders say – investing in the stock market has become as easy as depositing monies in a money market fund, with a guarantee of a return of principal, plus an undisclosed rate of return. The S&P-500 index is now on track to provide a positive return for the ninth straight year. The S&P 500 has been positive (on a total return basis) for 11 consecutive months and 18 out of the last 19-months.

     With their massive money printing schemes and ultra-low interest rates, the central banks have taken all of the risk out of investing. Some analysts now say, the biggest risk is not be involved in the stock markets. Since the fallout over the vote for Brexit in June 2016, the collective value of the world’s Top-43 stock markets has increased by a stunning +$29-Trillion.

      The Dow Jones Industrials have surged a staggering +5,500-points higher since the Brexit lows in June 2016 to above the 22,500-level this week. The raging Bulls have downplayed the Fed’s warning that it plans to hike the federal funds rate +25-bps higher to the 1.375%, at either the upcoming November or December meetings. The Fed’s “Dots Matrix” showed 11 of 16 Fed officials see the “appropriate” level for the federal funds rate, to be in a range between 1.25% and 1.50% by the end of 2017.

      The Fed also envisions three hikes in 2018 to as high as 2.125%. However, traders in the fed funds futures markets disagree with the Fed’s predictions, and see only 2 rate hikes by the end of 2018 to the 1.625% level. That’s a half-percent below the Fed’s estimates.

      The Fed also said it would begin “Quantitative Tightening” <QT> in October – a process of draining excess liquidity in the money markets, by reducing the size of its $4.5-trillion in holdings of US Treasury bonds and mortgage-backed securities <MBS’s>. The Fed will start QT with baby steps, initially draining $10 billion each month from the amount of maturing securities it reinvests. QT is scheduled to increase by $10-billion every three months to a maximum of $50 billion per month until the central bank’s overall balance sheet falls by as much as $2 trillion or more in the years ahead.

    However QE schemes led by Europe and Japan, are key drivers behind the parabolic increases in the US and global equity markets. 

     This week’s newsletter, (published October 1st for subscribers to Global Money Trends), explains why the parabolic increase has occurred. There are additional commentaries on other markets, for Gold, US Treasury yields, Crude Oil, and the Japanese, Russian, and Taiwanese markets. The Fed is signaling a rate hike in December to 1.375%, but US president Donald Trump will make a selection of the next Fed chief in the weeks ahead. The ECB is ready to start slowing the pace of its money printing operations, starting in January, so there will be plenty of drama in the months and year ahead.

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