Big Baby Wall Street (and the Signals They’re Missing)
Wall Street got what it wanted Wednesday afternoon and still threw a temper tantrum…
Here’s a little back story first.
This week’s Fed meeting was the most highly anticipated meeting in a decade.
The reason being the Fed was widely expected to deliver a rate cut of 25 basis points, which was something that had not occurred since 2008.
The goal of this rate cut is to help spur growth in light of trade tensions, a negative yielding bond market in Europe and a U.S. economy that is strong, but is also showing signs of slowing down.
In short, the Fed delivered exactly what Mr. Market wanted.
But Wall Street folks are a fickle bunch and stocks began dropping almost immediately after the 2:00 p.m. announcement.
The Fed Cuts Rates… Dow Drops Almost 500 Points in Minutes
We move as fast as possible on news like this. But it must be noted how incredibly fast the Dow dropped, along with other major averages, immediately after the news broke yesterday.
The see-saw action is Wall Street’s version of a vomit comet. And in light of the flash sell-off Wednesday, we have nothing more honest to say than Wall Street is throwing a childish temper tantrum of epic proportions.
The truth is no one really can say why investors are reacting the way they did after getting what they wanted.
Some experts note that while a 25-point cut is on par with expectations, many on Wall Street were secretly betting on a 50 basis point reduction.
And when Wall Street didn’t deliver this overly-dovish cut, Wall Street threw a fit.
Here’s What To Expect Next
Markets have been complacent this year in the face of mounting evidence of economic weakness and falling corporate earnings estimates.
Investors right now have far too much faith in the Fed’s ability to “rescue” financial markets.
The Citigroup U.S. Economic Surprise Index (dark blue line) has plunged in recent months as one economic data point after another disappoints to the downside.
Also notice how the S&P 500 index (light blue) has typically shown a high correlation with the economic data. This means stocks slump along with mounting negative economic surprises.
This year, however, we’re not seeing the same correlation — at least not yet. In fact, what you’re seeing above is the largest divergence in history between bad economic data and high stock prices.
Bottom line: In the wake of new rate cuts, the economy is either about to turn around in a big way, or stock prices will turn lower.
With stocks already started to dip as the news broke yesterday it appears the Fed may have been too late with rate cuts, as other economic factors like the trade war and negative yields in Europe and Asia continue to complicate matters on Wall Street.
We’ll have to get a little more price action under our belts to officially confirm which way stocks will now trend, but it never hurts to start planning defensively.
Here’s to growing your wealth,
Chief Income Expert