One year ago, today the NASDAQ 100 closed at an all time.  It is now down 31% from this level.  According to Bloomberg, this 249-day stretch is the third longest period on record that the NASDAQ 100 has not retraced all its losses since its 1985 inception.  The longest was 3,925 trading days—more than 15 years—following the era.  It took 416 sessions to rebound from the Crash of 1987.

As indicated, the NASDAQ 100 was created in 1985 and if GOOG and AMZN are considered as technology stocks, technology comprises over 70% of this index as per Bloomberg.  The selloff has wiped out almost $6 trillion from the benchmarks’ s market value, a selloff of the most widely owned companies in history.

Writing the obvious, the catalyst for the selloff are lofty valuations, massive ownership, declining earnings, and rapidly rising interest rates.  Today’s environment is kryptonite on steroids.

The recent market advance is predicated upon a Fed pivot.  Based upon an unending chorus of Fed officials, such is nowhere to be scene.  In fact, St. Louis Fed President Bullard presented charts suggesting a restrictive fed funds rate might be between 5% and 7%.

Bullard somewhat walked back the above when he stated “policy makers should raise interest rates to at least 5.0% to 5.25%…that’s a minimum level.”

The markets have discounted a 5% terminal rate.  The mere mention of a 7% terminal rate is frightening.

Earlier in the week, NY Fed President ended the notion of a “Fed Put” or the belief the Central Bank will utilize monetary policy to stabilize the markets, such has been the case during the past 15 years.

Inflation is a two-part phenomenon…too much money chasing too few goods fearing higher prices tomorrow.  It has a monetary component and psychological component.

Federal Reserve policy makers believe that inflation expectations are self-fulfilling prophecies, and they are dead set on preventing them from moving materially higher, an environment perhaps exacerbated by the nation’s $31 trillion and growing deficit, a deficit that FRB Chair Powell has indicated is unsustainable.

Bloomberg writes the Fed’s internal inflation expectations surveys are moving higher.  These surveys suggest inflation expectations are now at a record 8.25% for the past week, up from 8.02% the prior week.  The trajectory is almost linear since spring.

Several times the early 1980’s was discussed.  Inflation moved lower by 50% but longer-term interest rates rose by 50%.  Fed officials publicly expressed their frustration of the environment.  Unlike today, the markets had no confidence in the Fed’s inflationary fighting prowess, believing the recent decline was only temporary…aka low expectations.

The Fed is determined that such an environment does not again unfold hence the unending chorus of hawkish central bankers.

Today too will pass but will pass only when all stop suggesting a when a pivot is about to occur.  All markets declined moderately yesterday, the primary catalyst was Bullard’s remarks.

What will happen today?

Last night the foreign markets were mixed. London was up 0.81%, Paris up 1.12% and Frankfurt up 1.01%.  China was down 0.58%, Japan down 0.11%  and Hang Seng down 0.29%.

Futures are higher by 0.50% as the markets are continuing to access potential monetary policy. The 10-year is off 10/32 to yield 3.81%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.