It is hard to make sense of the type of sell-off we saw on Thursday. But sentiment appears to have turned today, with the major indexes on track to start today’s session on a positive note.
There is no one catalyst for a day like Thursday — a lot of little things simply came together to cause a sell-off like that and then morph into something enduring. I am not suggesting that we are on the cusp of a major leg-down — stocks are indicated to open higher this morning. But it would make perfect sense if the major indexes start losing ground. After all, we are coming up on the time when the U.S. Fed will be changing gears in its policy for the first time since late 2007.
Stock market bulls argue that we have been through many tightening cycles before and stocks usually do pretty well as the Fed starts raising rates. That view could very well be on the mark, but it is still perfectly reasonable to expect turmoil in stocks and a number of other asset classes as the Fed starts the extraordinary policy-unwind process.
In theory, a phase of Fed tightening that is accompanied by higher economic growth shouldn’t be a problem for stocks. The consensus view is that the U.S. economy is steadily improving and GDP growth going forward will be materially better than what we have been seeing over the last couple of years —-meaning GDP growth in the +3% vicinity going forward instead of the +2% range of the recent past. But what if the Fed had made up its mind to exit the crisis-era monetary policy even if the economy doesn’t graduate to +3% growth trajectory?
This is obviously not the consensus view, but I see a lot of merit in it, particularly when I try to make sense of the bond market’s benign reaction to the QE Taper and the coming tightening cycle. One could reasonably argue that the bond market doesn’t see the U.S. economy’s growth pace accelerating in any meaningful way. And this view is keeping a lid on long-term rates even as short-term rates start moving up a bit.
The Fed isn’t the only variable in the market — there is the question about the global economic outlook with growth momentum in Europe and China losing ground. Then there are geopolitical issues with the unsettled situation in Ukraine and a potentially other Middle Eastern conflict with the ISIS issue. All of this isn’t coming to a head today, but this should be on investors’ minds as they participate in the markets.
On most days, investors take a sanguine view of the issues involved as today’s rebound at the open shows. But the balance could be very precarious, as Thursday’s session confirmed, and it wouldn’t take much for the slide to become self-fulfilling and enduring.
In corporate news, Nike (NKE) came out with better-than-expected results and guided higher. BlackBerry’s (BBRY) results were also favorable, with sales coming short of estimates, but a smaller-than-expected quarterly loss.
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