Monday, February 5, 2018

Stockmarket Drop - Just a Correction or a Potential for Something Worse?

Obviously, the US stock market is now into a pretty sharp drop that has many people wondering what we are seeing. It is natural to wonder if this falling market is just a much needed "normal correction" for a market that has moved almost relentlessly higher for a long time now  OR  if we are seeing an end to the bull market and the start of a much more severe decline. 

If we are seeing the latter (the start of a much deeper decline), then we have to wonder if this could eventually lead to the "snowflake that triggers the avalanche" that Jim Rickards and others have been expecting for a long time now . Let's review some ideas on the situation.

First, we must quickly admit that there is no way we can know for sure what this stock market drop may mean longer term. When a drop like this begins after a market has gone up and up for a long time, the first pullback may just be part of a normal market correction (let's say 10%) before the market resumes moving higher or it really could be the end of a long term bull move and the start of a long term bear move. We won't even try to guess here what the answer to that question may be.

Instead, we will focus on things to watch for now that we do have a falling market. Let's examine a few possible scenarios:

1) Normal market correction - In this scenario the market might pull back 10% (or even a bit more) and then stabilize and start to move higher again. Those favoring this view would say that the US economy is improving and the recent tax cuts will add momentum in the coming year to help improve corporate earnings, spendable income, etc. 

2) Bubbles Bursting - In this scenario this market drop would be indicating that both the stock and bond markets have overshot to the high side based on the easy money policies (low interest rates and QE policies) of recent years. This view sees rising interest rates as the pin that might pop these "bubble markets". Janet Yellen recently added some credence to this view by saying markets are "high" in recent interviews as she departs the Fed. She adds she is not sure if the markets are in a bubble. Some will find some irony in her comments since they believe it is Fed policies that may have created or contributed to any bubble that exists in these markets. Even Minneapolis Fed President Neel KashKari says low interest rates from the Fed may help bubbles form in the addendum section of this article he wrote last year.  (see quote from the addendum just below):

"Could it be that such low rates make bubbles more likely to form and, if so, what should we do about it?" 

3) The Trump Factor - Here we branch into an alternative view on the situation. It is obvious that there is an ongoing battle/war between President Trump and some who are viewed as "the Washington establishment" who probably would prefer to see someone else occupy The White House. We have seen this battle seesaw back and forth all during the first term of President Trump. It must be noted that the President has now tied himself directly to the stock market by claiming that its big move higher over the past year is due (at least in part) to his pro business Administration and policies. He has attempted to use the stock market gains to acquire political capital which has worked well while the stock market is moving higher. So, what happens if the stock market has peaked and is headed into a long term bear market? Obviously, the political opponents of the President will attempt to use that against him in the same way he has attempted to use it in his favor. Those with a conspiratorial view may even suggest that there are forces within the so called "establishment" who would intentionally bring on a big stock market decline as part of this ongoing battle. (I see this kind of view is now appearing already in articles). Regardless of what causes it, a big stock market plunge leading into a major bear market will have political consequences so we must watch this carefully. If the markets were to fall into a deep crash, we then have the potential for the systemic instability "trigger" that Jim Rickards and others have long predicted.

What to do?

Here, we will encourage readers to do what we have always done in the past. Be diligent to monitor market events closely and watch for any signs that could indicate that true systemic risk is in play. Hopefully, that won't happen. But if it were to happen, readers should have a backup plan in mind as to what they would do if the entire system were to come under severe pressure for any reason. This should include an emergency fund and some idea how to deal with a disruption in normal banking transactions etc. If possible, it is a good idea for such a fund to include some precious metals available outside the banking system along with some cash. We view this as prudent behavior all the time, but especially when we see something like a sharply falling stock market in play.

Added notes: At 10 pm Monday 2-5-18, CNBC is reporting that market futures are pointing towards a rocky market open on Tuesday 2-6-18. They show US pre market futures prices here.

Something else to note: Usually when we see widespread market selling (including the crypto markets now), we also see a strong move into the US dollar. While the US dollar has had a minor bounce, so far we are not seeing much flight to safety to the dollar. Gold and silver have performed a bit better. This is something to keep an eye on during the course of this market event until things stabilize. If gold and silver continue to outperform, that might be significant information to pay attention to.

Update 3:30 pm 2-6-18: The market rebound put an end to the sharp down move for now. Obviously volatility is very high and we should continue to monitor events to see if this ends a correction or is just the start of a longer term downward projection for the stock market.

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