Financial Review

Black Monday 2018

….Stocks crash. Worst point decline ever. 2018 gains wiped out.

Financial Review by Sinclair Noe for 02-05-2018


DOW – 1,175 = 24,345
SPX – 113 = 2648
NAS – 273 = 6967
RUT – 52 = 1495
10 Y – .06 = 2.79%
OIL – 1.71 = 63.74
GOLD + 7.10 = 1340.00


Well, now we know what happens when the Eagles win the Super Bowl.


After a 666 smackdown on Friday, the Dow Industrial Average opened down 355 points; followed by a little bit of buying that wiped out the session losses, but never enough to turn the tide. As the trading day dragged on, buyers retreated. As the Dow moved below its 50-day moving average, support collapsed, and the floor fell out of the market in programmed trading on heavy volume. The Dow briefly dipped to 23,923 – marking a 1597-point drop from the Friday close, and marking the biggest intraday point drop in Dow history, and sending the Dow down 2693 points from the recent record high on Jan. 26 – in other words, more than a 10% correction from the high. The Dow Jones Industrial Average wiped out all of its year-to-date gains for 2018.


The S&P 500 pulled back 4.1% percent to break below 2,700. The broad index had traded positive earlier on Monday as the tech sector briefly rose. The S&P 500 also traded down more than 8.17% from an all-time high set last month and broke below its 50-day moving average, a key technical level. Similar story for the Nasdaq Composite – moved into positive territory early – then cratered on programmed trading that surely had a few quants losing their lunch.


Now, to maintain a bit of perspective – in terms of a percentage move – today doesn’t even crack the Top 20. The Dow was down 4.6%, the Nasdaq was down 3.78%. Trading halts were not imposed because the percentage moves just weren’t enough to trigger the circuit breakers. The S&P was down 4.1%. The first such circuit breaker kicks in when the S&P 500, falls at least 7 percent, what’s called level 1. Just because the percentage losses are not catastrophic, the real dollar losses are serious. The S&P 500 has wiped out more than $1 trillion in market capitalization in just 3 trading sessions. Apple, Alphabet, Microsoft, Berkshire Hathaway, and Wells Fargo have each lost more than $30 billion in market capitalization. Despite most everyone decrying record high valuations in recent months, it’s important to note that recessions, and not valuations, trigger bear markets and no one is calling for a recession anytime soon. In fact, most describe the pullback as “healthy” given the record number of days the index has gone without a 5 percent drawdown. Ray Dalio, who runs the Bridgewater hedge fund, called the pullback a “minor correction” and he says there is plenty of cash on the sidelines, apparently poised to come flooding back into the market. Of course, that’s what we always hear from Wall Street  – buy.


The major indexes also capped off their worst weekly performance in two years on Friday following a steep sell-off. The Dow and S&P 500 pulled back 4.1 percent and 3.9 percent, respectively, last week. The Nasdaq lost 3.53 percent. The VIX, or volatility index went from a nice, complacent reading of 11 just 6 sessions ago, to hit 35 intraday.


Friday’s fall seemed to be triggered by the especially strong U.S. non-farm payrolls report that showed average hourly earnings posting the strongest annual gain since June 2009. Traders worried the strong wage growth could spur the Federal Reserve to hike U.S. interest rates more than expected this year, slowing earnings growth and throwing a wet blanket on the fire of economic expansion. On the other side of the debate is the fiscal policy – the tax cut plan, which was like throwing gasoline on the fire of economic expansion. This might be the most poorly timed fiscal stimulus package ever. Basically, it takes the next year or two of economic expansion and pulls it forward to the present, with possible inflationary consequences. The Fed has already started to reduce its more than $4 trillion of bond holdings this year, the increase in debt issued to pay for the tax cuts and the reduction of the Fed’s holdings could flood the market, driving prices lower and yields even higher. And the cherry on top is the weak dollar, which makes US goods more attractive to overseas buyers, but also makes US financial assets less attractive. Why buy a one-year Treasury note with a yield of 1.8%, when the dollar is dropping 10%?


It is also important to remember that the markets tend to self-correct. If this crash continues, the Fed would likely change its stance on rate hikes. Already, the probability of a third rate hike for 2018 has dropped to less than 50% in futures markets. A rate hike at the FOMC meeting in March has been well-communicated but it is not written in stone.


On Friday, Janet Yellen finished her term as chair of the Fed. The new Federal Reserve Chair is Jerome Powell. There was the feeling Janet Yellen would always bail out the market. That was the notion during her tenure. It looks like Yellen forgot to give Powell the password for the Plunge Protection Team. The markets like to test a new chair. On Bernanke’s first day, the Dow tumbled 2.2%. On Yellen’s first day, the Dow was off about 0.9%. Greenspan was on the job only 2 months before Black Monday 1987. Before Yellen’s departure on Friday, the Fed imposed long overdue discipline on Wells Fargo.


Yellen’s last official act was to order Wells Fargo to “restrict the growth of the firm until it sufficiently improves its governance and controls.” The bank’s total assets, averaged over any two-quarter period, will not be allowed to exceed its total assets at the end of 2017, until it gets its act together to the Fed’s satisfaction. The Fed’s action came in a response to Wells Fargo’s recent string of regulatory failings, of which the most embarrassing was the 2016 revelation that Wells Fargo bankers, pressured to meet sales quotas, had opened up millions of fake customer accounts out of thin air.  The Fed also announced that  4 of the bank’s directors will step down, and “sent letters to each current Wells Fargo board member confirming that the firm’s board of directors, during the period of compliance breakdowns, did not meet supervisory expectations.”


Now, it would be naïve to imagine that there is any one single cause behind today’s crash. Programmed trading was part of the problem, concerns about fiscal policy played a part, inflation concerns, First-day-Fed-chair blues, weak dollar worries, earnings season wind-down. To the list, let’s add bumbling politicians; a wide-open topic; let’s focus on politicians bumbling with a budget. It’s Monday and the House and Senate will trickle in to Washington with late afternoon sessions planned, a leisurely pace considering government funding runs out by the end of the day Thursday and none of the looming issues surrounding it have been resolved. The biggest obstacle to a long-term funding solution, or even a short-term punt, is immigration reform. As part of the deal to reopen the government, Senate Majority Leader Mitch McConnell said Republicans would negotiate in good faith on a deal to resolve the DACA issue. He said that if there was no deal by February 8, he would open the Senate floor for a debate on a bill. In the week and a half since the deal, there has been little outward sign of progress on an immigration plan.


Expect another continuing resolution, to kick the can down the road a few more weeks. Eventually, they will run out of road. Perhaps the most pressing is the long-term funding for the government. Both parties want to increase spending for defense and nondefense programs for fiscal-year 2018 beyond caps imposed by the 2011 Budget Act, but leaders must agree on how high that funding can go. Republicans want to increase defense funding by almost twice as much as nondefense spending, while Democrats want the caps on the two sides increased in equal amounts. Importantly, another punt on funding would most likely put the next shutdown deadline close to the date when the federal government will hit the debt ceiling. The debt ceiling has been a politically divisive issue, but stepping over the limit would throw the global financial system into chaos. In the $2 trillion Treasury-bill market, where the U.S. government turns for short-term funding, investors are showing they’re plenty nervous about the approaching deadline to raise the nation’s debt ceiling. With Treasury expected to exhaust its borrowing authority as early as the first half of March, a four-week bill sale on Tuesday will serve as the latest gauge of investor anxiety. There’s growing concern that the impasse over the debt limit will become entangled with efforts to keep the government open. Traders are asking for higher yields to own previously issued bills maturing March 8. What’s more, an auction last week of bills due March 1 drew the weakest demand since May.


When it rains it pours. Bitcoin tumbled for a fifth day, dropping below $7,000 for the first time since November. Bitcoin dropped 22% today. Lloyds Banking Group joined a growing number of big credit-card issuers have said they’re halting purchases of cryptocurrencies on their cards, including JPMorgan Chase and Bank of America. Several cited risk aversion and a desire to protect their customers. That’s interesting. Are they really trying to protect their customers? Next thing you know, they’ll decline your purchase at the Cheesecake Factory because, really who needs all those calories?


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