03 May ARE THE MARKETS REVERTING BACK TO NORMALCY?
Perhaps I should have titled today’s remarks that the markets have never really deviated from normalcy. I have written many times that I believe interest rates are the largest component of valuation (and technology based trading) formulas. Markets today are only reacting in greater fortitude if interest rate assumptions are challenged.
Yesterday the averages came under pressure because of the opaqueness of the Fed’s statement stating the next move on interest rates can either be up or down. The dovish narrative was perhaps shattered.
Speaking of shattered, a major reason why many market participants are demoralized is the constant blow up of marquee names or trading strategies. The only strategy that appears to be working is indexing; a strategy in itself is perhaps the most overcrowded and concentrated trade in history.
Bloomberg wrote yesterday a total of 68 companies in the S & P 500, many of which are household names, have suffered 2019 losses greater than 10% in one day. Most of the blame falls on disappointing earnings where selling is occurring into the abyss, the result of company stabilizing mechanisms, mechanisms that have been shattered in today’s environment where cost and speed of execution is the only determinate. Approximately 90% of trading is the result of algorithmic trading or passive/indexing investing. The human element is virtually absent.
The major issue at hand is what happens if the monetary policy again changes and interest rates revert back to historic norms based upon prevailing economic conditions? In December all received a possible taste of what could occur if such does occur.
Today is the release of April’s unemployment data. To write the obvious, there could be an outsized reaction if the data differs greatly from the consensus view. Wages and the labor participation rate could feature prominently.
Last night the foreign markets were up. London was up 0.79%, Paris up 0.20% and Frankfurt up 0.30%. China was up 0.68%, Japan down 0.22% and Hang Sang up 0.46%.
The Dow should open moderately higher on earnings, trade and economic optimism but sentiment could radically change if the data differs considerably from the consensus view. The 10-year is off 4/32 to yield 2.56%.