Sometimes -- not often, but sometimes -- we get days where it is just too crazy to buy stocks and is really easy to sell stocks. Today's one of those days.
So why don't we use today's session as a teaching example, a way to examine what triggers selling and why and how sometimes it just pays to sit on your hands and watch things unfold until they just get less crazy.
Let's play it by the clock. Before the sun came up the stock market looked like it was going to make back some of the losses from yesterday's session. Why?
First, we didn't know the derivation of the horrendous shootings in California. If it were workplace-related and area-specific, then we would just, once again, wake up to the sadness of a mindless tragic incident. There were no other incidents, a la Paris, so there was hope that this mass shooting was not part of the beginning of a wave of mass shootings and coordinated terror. You could argue that it is a terrible world and could take heart that it was an isolated mass shooting and not part of a larger terrorist effort, but I am simply noting that the market seemed to want to rebound on that news.
Plus, the S&P futures were trading up because Mario Draghi, the European central banker who is famous for saying that he would use any means necessary to get some employment growth in Europe, was going to announce his next set of initiatives to improve the financial landscape of the European Union. Draghi's name is synonymous with global growth in a market starved for global growth. So whenever he speaks, big money likes to be as invested as possible to take advantage of whatever his next initiative is.
But this morning Draghi didn't deliver. He gave you some mild efforts, not his "pull out all stops" talk, and it made these big investors think that perhaps Draghi is either out of bullets or satisfied with how things are progressing. In fairness to the man, he is data-dependent, and the data out of Europe of late has been stronger than that of the United States. We know this ourselves. Just think about what Manny Chirico, the CEO of PVH (PVH), the giant apparel concern, said last night. Europe is his strongest market.
Draghi's less-aggressive ways immediately had two impacts: the European stock markets were crushed, with the average bourse falling more than 3%, and the dollar plummeted versus the euro.
Both were totally unexpected. Both were totally out of sync with what the large macro funds, the ones that make gigantic bets, thought; they were caught long stocks and short the euro. Or in home-game speak, they had thought stocks were going to go up in Europe and they thought the euro was going to go down.
They were wrong and they panicked and sold stocks and bought euros to unwind their trades. Smaller investors don't do this stuff, but big hedge funds are always making these kinds of decisions and then panicking and unwinding them when they don't work. This scenario typically happens because they are using borrowed money, but also because when you make a trade and the trade goes awry you try to undo it as fast as possible because that is the disciplined thing to do and discipline trumps conviction.
Now as if that wasn't crazy enough, these same macro traders imported the negative -- the selling of stocks -- but didn't import the positive, which was the decline of the dollar.
Why did that happen? More craziness. There is no doubt in my mind that the 3% gain in the euro is hugely positive for our internationally based American companies. If we just endlessly talk about how earnings are being hurt by a strong dollar, we should therefore take heart when the dollar gets weak. But I think that too many investors were freaked out that Draghi didn't deliver and just decided that the dollar didn't matter as much to these companies after all.
Talk about craziness. That's just a wrong judgment by the market. Or a judgment that says there is no way that the euro is going to stay strong and the trend will reverse itself. Either way, it was all unsettling
But it's not as unsettling as another big change -- a huge jump in interest rates. Remember, investors can and have absorbed higher interest rates over time and been comfortable owning equities. However, this was one of the biggest one-day moves in interest rates we have seen in ages.
What triggered that? I think that despite worries about a decline in manufacturing jobs, there is without a doubt a belief that the job market is growing tight; after all, we had low unemployment claims again, and perhaps the non-farm labor report that comes out tomorrow might show that there is genuine wage pressure building as the slack is taken out of the economy.
In other words, inflation is going to make these current low interest rates a crummy investment. Remember the mindset of big investors. They want to get a decent return, and if inflation is roaring back, the return from bonds is too low. So they sell bonds now, betting that they will lose value and yields will go higher. Bonds are easy to sell and easy to buy back. So why not ring the register and revisit?
When that happens, it reverberates into stocks that have good yields -- namely, the utilities and real estate investment trusts. Jeez, they were crushed today. When they trade like bonds, they go down like bonds.
I always tell you that when it comes to factoring in the value of stocks, we care about how the companies underneath are doing. Are sales stronger than expected? Are earnings better than expected? Are companies bullish about the future? Are they raising forecasts?
Typically if the answer is "yes" to all of those questions, then the stock of the company you are examining will go higher. There is, however, a moment where it won't. That's when the market is concerned about inflation and investors don't want to pay up for their earnings streams. Inflation erodes the value of those future earnings streams.
The stocks hardest hit? The companies with the greatest potential growth down the road. That means companies such as the biotechs and the highest-growth technology stocks.
Ugh, that's just what happened. Given you don't know when interest rates are going to be done going higher; I mean, what happens if we get a very strong employment figure tomorrow and maybe the Fed will have to put through several rate increases sooner rather than later? These stocks lose value quickly.
We are not done with crazy. We've got an OPEC meeting tomorrow. There are so many short sellers in the oil markets that we saw traders lock in gains just in case the Saudis -- the swing vote in OPEC -- decide to stop pumping like mad. It is highly unlikely they do that. Still, nobody ever got hurt taking a profit.
However, there oil stocks themselves, especially those of the pipelines, the natural gas group and the oil service companies, went down! That's crazy, and crazy not like a fox. Crazy as in, I don't even know which one is right, so why not wait and see what OPEC says rather than anticipate it? It's kind of like waiting to see what the employment number will be before taking action.
Finally, there's the real craziness, the sadness of terror and mass death in California. This market was going down but in a rather subdued way until authorities confirmed that the killers had terror ties and had been linked with radical elements. In other words, they may not have acted alone and might be part of a larger conspiracy. It is always so hard to link real tragedy with something as pedestrian as money. But we do know that mayhem produces fear, and fear produces selling. They do go hand and hand.
So, to put it all together, some days are just too crazy to sit tight, even as I would advise you that's what you should do. I can't blame anyone for saying "It's too darned crazy, I am going to take money off the table, or book profits, or just embrace less risk." When that happens, you get sell-offs. This is a classic one, and we don't know yet when it will end. Remember, though, even in the dark days of 2007 to 2009, they always do and this isn't anywhere as crazy as it was back then.