We are currently living through the worst December since 1931, in terms of returns on the S&P 500. Frankly, other indices are doing worse. But since we all follow the S&P, we will use that as our baseline.
With this type of market performance, emotions can get stirred up. I am certainly not immune to those emotional feelings, but I do have a series of metrics and processes I follow to keep the facts out in front of my emotions. I was going through these processes when I saw clearly what was happening in the markets. When the 4th quarter newsletter comes out, I will talk more in depth about these things. But given the speed of this market sell off, I figured putting together a quick note made a lot of sense.
For starters, on October 3rd the S&P closed at 2,923. The next day it started its decline. And as I type this, it sits at 2,416. That equates to a 17.34% drop in the market. What happened the night of the 3rd to kick start this avalanche of selling? Fed Chair Jay Powell was interviewed by Judy Woodruff. During that interview, he made the comment that “(interest rates) were a long way from neutral.” This implied that the Fed had many more interest rate hikes to go before they reach a stopping point. The market had not priced that in and, therefore, began selling stocks immediately to price it in.
From that point on, several Fed Governors tried to walk that statement back. However, the damage to market psychology was done. The market started to show a little stability before the FOMC meeting last Wednesday. But during his comments after the decision to raise rates, Fed Chair Powell made ANOTHER BLUNDER. This time he was adamant that the automatic program of having $50 billion a month roll off the Fed’s balance sheet wouldn’t be changed, regardless of market conditions. This, of course, spooked the markets again and the sell off intensified.
NY Fed President Williams was then interviewed Friday by CNBC and he beautifully articulated the Fed’s policy regarding the “autopilot” program and how they could, and would, alter it, if necessary. The market responded well to his comments.
These blunders regarding market liquidity are the biggest thing that is scaring the markets. The markets are worried about another 2008 style liquidity crisis. In fact, there is so much worry that Treasury Secretary Mnuchin reached out to the CEO’s of the 6 largest banks over the weekend to check on their operations. All of them reported no problems with operations or liquidity. This makes total sense because the Fed wouldn’t be tightening monetary conditions if it saw anything less than a robust economy. Furthermore, our current set up is vastly different than it was in 2008. For starters, bank balance sheets are WAY stronger. And, perhaps most importantly, the mark-to-market accounting rules have been done away with.
But, in my opinion, the market’s worries are not based in fact. They are based in fear. We all know the saying, “we have nothing to fear, but fear itself.” Well, we are wallowing in fear right now. And, to be frank, I understand why. We have no effective leadership to quell these fears. For example,
-Our Fed Chair got out in front of the entire world and created a worry about over-tightening in the credit markets by his careless comments.
-The President of the United States, just after NY Fed President calmed markets down about a liquidity event, decided not to sign a spending bill and, therefore, threatened a government shutdown.
-Congress then couldn’t get a spending bill passed that included ample border security to satisfy the President and the government, indeed, shutdown.
-These actions may not be linked in terms of their topic, but they are linked in the sense that they create a sense of uncertainty and worry.
You can add antics like this to a long list of faux pas that haven’t help build a sense of comfort and security in our current leadership. Then when you add in tightening credit markets, you have a market that is running on fear.
Having said that, Warren Buffett is known for saying “Be fearful, when people are greedy. And be greedy, when people are fearful.” And as I look at investment ideas, I haven’t seen so many attractively priced investments in a long time.
BUT…before these cheap investments turn around we probably will need something, or someone, to calm the markets down. Most likely, we will have to play the waiting game.