Most are searching for a catalyst for the decline in the NASDAQ.  Yesterday’s prevailing reason was the Fed’s statement echoing well known COVID concerns.  I ask is this not oxymoronic given that the Fed actually increased its 2020 outlook from June.

The central bank is now projecting a 3.7% contraction in 2020 as compared to a June estimate of a 6.5% drop.  Growth is expected to rebound to 4.0% in 2021.  The fourth quarter unemployment rate is now forecasted to be 7.6% vs 9.3% in June and 5.5% in 2021.

Regarding inflation, the PCE is now projected to rise by 1.2% in 2020 vs a 0.8% June estimate and 1.7% in 2021.  Longer run fed funds rate was left unchanged at 2.5%.

I reiterate I think the decline is partially the result of an unquantified monetary policy outlook, one that would permit inflation to run above the 2% speed limit for an undefined period as the economy heals itself to full employment.

As widely discussed the deficit is exploding.  Fiscal restraint is nonexistent.  There are only two ways to overcome debt; restructure or growth.  Can I remotely suggest the Fed is attempting to grow the country out of its mountain of debt which is increasing every day?

Money supply growth is at record 28+%, interest on excess bank reserves is close to zero, monetary velocity is accelerating.  Historically these conditions are synonymous with or are conducive for inflationary growth.  Will today be different?

It is widely accepted the NASDAQ is vastly over owned with a concentration in a handful of names, a concentration that is perhaps leveraged or amplified via options.  A basic premise for a stock to go higher is more buyers than sellers.  If everyone owns the stock, who is left to buy?

Late yesterday afternoon JP Morgan believes a major reason for the recent decline is similar to the one I have been discussing…an unquantified inflation/monetary policy target that could cause the yield to curve steepen that radically changes valuation assumptions.  Such could radically hasten the trade from growth to value according to the Bank.

Speaking of buying, Saudi Arabia showed its determination to protect the oil recovery by delivering a rare public rebuke to a close ally that had been overproducing.  Moreover, the Saudi Energy Minister warned anyone who is shorting oil by stating “I am going to make sure whoever gambles on this market will be ouching like hell” further commenting OPEC will be “proactive and preemptive” to support prices and “take any action necessary to do such.”

Oil closed up about 2.3%.

Last night the foreign markets were mixed.  London was down 0.12%, Paris down 0.14% and Frankfurt up 0.39%.  China was up 1.51%.  Japan up 0.18%  and Hang Sang up 0.47%.

The Dow should open mixed.  Will quadruple witching hour impact the markets?  The 10-year is up 6/32 to yield 0.68%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. 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. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.