According to the media, it seems Wednesday was a terrible day for stocks. The Nasdaq was down 1.6%. The Dow closed below the 50-day moving average, for some folks a key line of support. The Russell 2000 waded into correction territory by being down more than 10% from its July peak. Unlike before, it got stuck in it. The first major index to make that journey in a while.
Small caps have had a hard time. Many of them have gotten destroyed. But they’re small caps. They’re not in the Dow, and they’re not in the S&P 500. They’re too small to move the Nasdaq which is dominated by tech mastodons. But in the Russell 2000 with its focus on small caps, these stocks can have a little say.
That was the kind of day when the host of a radio news show rushed through the dismal market numbers and concluded with her cheery voice, “But analysts say there’s no reason to panic.”
The idea that someone might even think of “panic” and breathe that word into the microphone while on the air when the S&P 500 is down a whopping, breath-taking, dizzying, let’s see, 3.6% from its all-time high a couple of weeks ago – that is reason by itself to, well, panic.
Who are these panicked analysts that are whispering the word “panic” into the ears of radio hosts, at a time when the S&P 500 is down not 30% or 40% or 50%, but a mere rounding error?
Are these the same folks who, after all these years of Fed-induced market mania, lost the neurological ability to fathom that stocks can actually go down?
The idea that stocks can only do two things – rise slowly or melt up – is what the Fed has been teaching us since the financial crisis through its jawboning, supported by $3.5 trillions of printed money and nearly six years of zero cost of capital for Wall Street. It led to a trading philosophy that prescribes that every tiniest dip must be bought in order to stay ahead, a philosophy that has been relentlessly rewarded, so far.
It also led to a total lack of volatility, or more precisely, a lack of downward volatility, though there has been plenty of upward volatility, and no one complained about that. It has led to a now ingrained belief – or rather a proven fact – that this will go on forever. And if it doesn’t, by golly the Fed will see to it that it does.
But now that buyers forgot to, or failed to, or refused to buy that tiny dip for the first time in a while, the word “panic” makes its way into the radio news – even if she said that there was “no reason to.” Not yet. Maybe that was the implication.
Perhaps those analysts were worried that people might pay too much attention to small-cap stocks, which have been leading the rally, as they normally do, and which are now getting hammered. In May, the Russell 2000 already dropped briefly into correction territory by being down 10% from its March peak, but the day wasn’t up before the dip buyers barged in with fresh money, and it bounced back.
This didn’t happen on Wednesday. The problem with small caps is that they’re also normally leading on the way down. They’re a precursor in both directions.
Did dip buyers stay away because their nerves were getting rattled by the Fed’s promise to end QE over the next few weeks? The radio host didn’t say.
Or are nerves getting rattled because the Fed is publicly and privately fretting about what it calls “financial instability?” It’s the PC expression for highly leveraged asset bubbles and the havoc they wreak on the financial system when they implode. So the Fed has a wary eye on the ballooning leveraged loans and junk bonds, the all-out hunt for yield when there is none, the “stretched” asset values…. The Fed wants to tamp down on some of the maniacal excesses that it had encouraged for years. It’s talking about raising rates. It’s talking about macroprudential measures. It’s talking about tighter supervision of its bailiwick. The tone has changed.
The hyperventilation about markets declining a little recently is a clear sign that this has been a one-way street for way too long, that people have lost touch with the possibility that assets can actually decline in value; they’ve lost touch with it because stocks and bonds haven’t seriously declined in value for so long. And now, with asset values perched precariously in the rarefied air of high-altitude wishful thinking, folks have been spooked for a few moments out of that mind-numbing complacency – another catchword the Fed has been fretting about.
But what should be the scary thing is that this Fed-induced upward mania has been going on for so long that even erstwhile rational minds, after having been clobbered by the markets, have gotten tangled up in the notion that this would somehow last forever.
The high-yield party turns into a bloodbath. Happening right now beneath the surface of the S&P 500. Read… Junk Bond Bubble Cracks, Destroys Stocks One at a Time
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Wait ’til QE ends in 4 weeks.
Don’t worry, QE Europe style will be cranking up in a few weeks. What do I know but it smells to me like the CB’s are taking it in turns on the printing press. Appears that Belgium has stepped up to the plate lately buying a years worth of its GDP in US securities, so the Fed will probably step in and buy Euro trash as well (or GS or JPM).
The CB circle jerk continues apace.
Nothing will happen in 4 weeks. If it did, the blame will fall on the fed. Fed will continue to spend its Pomo money for a while. Feds excuse for leaving the market is a strong economy. The stocks will need to reflect this claim.
But the last day of Pomo is 28 October, so how can this be? A couple of years ago, Pomo days coincided with market rises. Then the fed changed its tack. The market would rise a few days — usually a day or two later or may be three days later — so the rest of us outside were left guessing.
If this logic is correct, fed is caching the paper it has created in the channels (hedge funds, banks?) only to have it released after October.
This gives the fed a nice cover. Their claims of a strong economy will be validated and mass layoffs at Silicon Valley companies won’t happen in November and December. Also, those months are holiday season days and retail does most of its business then. If people are spooked because of falling stocks, they will spend less — wealth effect and all.
So market will not collapse at least until January. By then O will be lame duck and he has no other election to support, so he’ll probably let the cooked numbers trace their way back to the mean.
This is your captain speaking. We are cruising at 38,000 feet and there is no cause for alarm.
“and although our port engine is on fire, we have a starboard engine which (crossed fingers) is doing just fine”
If anyone with a common thread of sense could read the earnings reports and see how profit has been declining the past 2 years, How stock buybacks have been at the most highest since the great crash. How leverage is at a all time high. EPS has been declining. But the anal/ysts, yea that’s the word people since I am being nice since they know all just keep spewing one lie after another without looking under the hood and running the diagnostic and realizing that the engine was running out of gas.
I don’t watch any of the business stock news anymore but used to watch PBS NBR (Nightly Business Report) long time ago when Paul Kangas used to be on it.
Anyway – I saw first few mins last night after watching PBS Newshour and 2 lackey monkeys guests were both exhorting that market always heads up long trend and advised the investors not to panic. LOL Bet both are in the midst of liquidating on their private accounts.
Sept is the worst month followed by Oct and my gut tells me that the Janet and POMO squads will do their best to hold the markets at elevated level to help the troubled Dems with Nov election and then the floor will drop. You can bet that the lackey commentators will be saying don’t miss the year end bull move.
Stock prices simply measure social mood.
When social mood is ebullient, prices are bid higher and people want to be told that all news is good news…so that’s what CNBC et.al., tell them.
When social mood is waxing negative, stock prices sag and eventually (once things are down a whole lot) all news is bad news because that’s how people feel.
A simple chart of any major stock average the last couple years reveals an echo of the asset mania we experienced from 1995-2000. That we’ve had two stock manias in such a short period of time is historically unprecedented and astonishing. That this second will end even more badly than the first is highly likely. People got “all lathered up” in social euphoria and bid prices to the stratosphere. The necessary and predictable denouement is a trip to the other side of reason and logic. The question isn’t how far down, it’s have we begun the descent? The daily chart says “YES,” but the weekly chart has yet to confirm.
2 manias? There was 2000, then there was 2008, and now… I count that as 3
And then there was the one that ended so spectacularly in 1987. I was just learning the ropes when that one hit me. Tried to call my broker, first to sell, then to buy, and never could get through. I guess my account wasn’t big enough to come that special phone number that gets answered during a crash.
Oh yes I recall Oct 1987 and lest we forget “flaky”Elaine Garzarelli’s lucky call. Started working in 1986 out of college and my meager 401k got hit but don’t recall how badly.