What caused Friday's drastic pullback? Why was it so horrific and what does it tell us?
On Friday, I believed that it was the inversion of the yield curve and the recognition that the algorithms are set to sell all stocks, regardless of their ability to thrive with an inversion. I continue to think that's the case if only because so many people are willing to point to the previous inversion that proceeded the Great Recession.
Perception is more important than reality so even though I believe there is no recession on the horizon I certainly accept that reasonable people, teamed up with their algorithms, can distort the market with rapid selling.
But I think now there's more in play than that. I see several negatives on the horizon that need to be discussed in tandem with the inversion. Again, the inversion concern isn't a total canard but at a certain point it will be built in to the markets and I don't want it to cloud judgment.
Here's the list of what also might be ailing us and causing such a precipitous decline.
1. Brexit, while boring, has truly put a crimp on European growth, far more than people realize here. Even a cursory trip to speak to executives in Europe causes great pause as no one seems to know how goods will go in and out of Europe to the U.K., including outfits like FedEx (FDX) , which are very much in the mix of how duties are calculated and collected.
2. The trade talks with China have grown murkier all of a sudden. With the decision by President Trump to keep the current tariffs on even WITH a trade deal, he is taking a tack of no trust and verify, something the Chinese, in my opinion, won't got for. Not only that but President Xi went to Italy last week as part of his Belt and Road Initiative of broadening ties and lending money for infrastructure to struggling nations. That drives the hardliners in the White House crazy. So, consider last week one of the lower points in the trade talks.
3. The stock market may be running out of fuel for the moment as sellers seek to raise money for all of the upcoming deals. The success of the Levi Strauss (LEVI) IPO may signal that it is time to liquidate high-growth stocks to get ready for other high-growth stocks where you have to pledge that you will hold on to deals to be able to get more deals. It's a tie up of cash of immense proportions and this market is not prepared to handle it.
All of these taken together create a worrisome picture, one that can explain why it wasn't just the banks that fell on the inversion news but many of the cloud kings and abettors, which were really quite weak as the Nasdaq fell more than the rest of the indices.
Again, I am not dismissing the fact that the Fed is on hold because it believes the economy has gotten weaker, which can be code for it fears a recession. It is, again, imperative to recognize that we have much that is good: lower rates, more deregulation and tax cuts.
All that said, this list, particularly the item which says there needs to be selling to beget more buying, at least of the new merchandise, spells a decline until the capital is raised, a trade deal is reached and Brexit is, at last, over.
