Liberals will hate this post. Why is the market melting down all of a sudden? We had such a great run. Everything was hunky dory. Here is a year-to-date chart from Trading View.
For what it is worth, last December I predicted the market would be higher in 2024. Markets never go lower in Presidential election years. Not a tough prediction for Captain Obvious to make.
If I said I saw the rise that the market took from mid-January to the end of March, you could stop reading right now. I don’t have a crystal ball and I don’t think anyone saw that strong of a bull market. The Bears were confused. I wasn’t bearish but I couldn’t put my finger on why the rally was so strong.
The Bears were getting lectured about how they shouldn’t bring their politics into market analysis, and those giving the advice were correct. Your own political bias should never enter into how you make financial decisions but gosh darn it the ability to try and keep yourself from doing that is extremely hard.
How low can the stock market go? Markets don’t like to change direction when they get momentum. 30 years of trading my own dough has taught me that. I am not a big technical analysis guy but I certainly take a gander at charts for guidance. This market easily could hit 494.00. It would not surprise me to see it trade 496.00.
When information changes, it will stop. The key drivers are inflation data, interest rate data, and war data.
Keep your eyes on the ten-year note and the SOFR contracts. Here are a couple of charts. When they move lower in price, it means interest rates are going higher. These are year-to-date charts so you can see exactly this year when interest rate expectations finally changed. Here is a link to the entire yield curve which is inverted right now. That usually is because a recession is expected. This is because it is more expensive to borrow money in the near term than it is the long term. Intuitively there is more risk in lending long term, hence the cost to borrow should be higher. Currently, 1 month rates are 5.5% and 30 year rates are at 4.7%.
SOFR (3-month interest rate)
If you are new to trading, this is not the “craziest market” that has ever been. Talk to someone with a lot of gray hair about October 1987, LTCM, 2001, and 2008.
This break feels normal and logical even though it is steep and fast.
What fed the bull?
The mainstream opinion in the press and among practitioners of Keynesian economics was that the Federal Reserve was going to cut the interest rate at least three times in 2024. Some classical economists disagreed but their opinions are usually drowned out.
To be fair, if you put a bearish interest rate position on early this year with the expectation that the Fed was on hold, it would have been extremely hard to hold. The market would have flown in your face and the continuous margin calls you would have received might have made it hard to sleep at night.
On Twitter, I have been saying there is absolutely zero chance that the Fed could cut given the rate of inflation. I have been saying exactly that since December. The market is waking up to that cold fact now.
Inflation has been caused by President Joe Biden and his spending spree. He didn’t have to pass a trillion-dollar spending bill, but he did. That was on top of all the profligate Covid spending the government did. I argued vehemently against a forced shutdown of the worldwide economy and it turns out I was right.
Not only was Biden’s spending spree a direct cause of inflation but many of his policies are inflationary too. Energy policy is a perfect example. Democrats love to say how much fossil fuel production there is in the US but it’s not Joe Biden’s doing. He has done everything in his power to kill it. Electricity prices around the country are up almost 30% thanks to the subsidies and other effects Biden has brought to screw up the market for energy.
The other factor is Biden’s foreign policy. This is especially apparent since the October 7th attacks against Israel. The market is now worried about a full-blown war with Iran. If you think Iraq was bad Iran will be worse. Remember the old line, “You broke it you fix it.”? Times that by 100 with Iran.
Biden is no ally of Israel despite his words. Actions speak louder. We don’t know what Biden would do if Iran attacked Israel and Israel’s response. Uncertainty is not something that helps markets retain a bullish tint.
Not only that, but Biden has utterly screwed up in not only Afghanistan but Ukraine. He and his team have never been correct at any time on any foreign policy decision. The market fully expects them to blow it again so it is selling off in response.
Do you think Biden is prepared for what could happen with China? I do not think he is prepared despite what they say.
The border has virtually little to no effect on the stock market. But, traditionally markets will get a little more frothy when they expect Republican control of the White House vs Democratic control. Results once each party gets control don’t reflect that meaning markets don’t do better under either party. Bull markets are not caused by Presidents but they can certainly start a Bear market.
The border will affect the election, and today it looks like the market expects Trump to win.
Market pros call that “risk-off” and there are a lot of reasons to pull money out of stocks and sit in the safety of US Treasuries. Someday if US government spending doesn’t slow down, the safe haven might in fact be Bitcoin.
Won’t the Bitcoin fanboys be happy then?
I have been in your camp on interest rates since January 1st of this year. No way the Fed cuts rates like the market was expecting. I thought they had the opportunity to cut once and that would be late this year. Go figure right around the election. Did anyone notice the 10 year auction this week. It went horribly. (Govt spending out of control) How about the commodity markets. Grains are the only one showing a bear trend. What really gets me is that these investment bank analysts calling for cuts in rates are completely missing the real costs that the average American is having to face. I wonder if the Fed is noticing? One does not have to wonder why the media cannot figure out why Biden is not popular after this bull trend in equities. The average Joe/Jane is getting plowed by inflation and its everywhere you look. And your point on war in the middle east and/or Ukraine just adds a bit of nervousness. Tells me to look for a larger correction in equities in the near term.
Great post Mr Carter! We should probably do a "George Castanza" and do the opposite of whatever the people in power (Obama's 3rd term) tell us and we'd be okay. Pray for the country!