According to what we all learned in Econ 101, higher interest rates are the tool used to slow a raging economy that is triggering runaway inflation. When the Fed was striving to recover from the financial meltdown of 2008, the FOMC’s target for inflation was a minimum of 2%. Bernanke frequently assured us that low interest rates weren't a problem as long as inflation remained contained at or below the FOMC target of 2%. Was Powell just trying to flex his muscle and show Trump who’s boss after Trump’s earlier tweets about the previous interest rate hikes? If so, Powell’s ego is costing ordinary Americans a lot of money. Earlier rate hikes this year could be justified, but this week’s rate increase, the fourth increase this year, just sent the market into the toilet for absolutely no good reason.
The Standard and Poors 500 Index (SPX) closed today at 2417, down 51 points. SPX is now down 21% from October 3rd, meeting the traditional definition of a bear market as opposed to a correction. The S&P 500 lost 6.7% this week alone and is now down 10% for the year. Unless something dramatic happens, 2018 is going into the record books as a losing year.
On Wednesday morning, the markets appeared to be finding support amid speculation that the Fed would not raise interest rates again. After the announcement, the positive gains for the day were erased and the plunge began in earnest. Trading volume in the S&P 500 companies ran above the the 50-day moving average (dma) all week and spiked today, but that was to be expected since this was quadruple witching.
SPX has run along the lower edge of the Bollinger bands every day this week, and this is very unusual. The February correction was more normal, with occasional pops back higher during the pullback. This was an unusually severe week in the markets.
Volatility, as measured by the S&P 500 volatility index, VIX, closed today at 30%. As one might expect in a week like this one, VIX moved higher each day this week after opening Monday at 22%. VIX reached highs around 25% in the October correction, and hit 37% in February. This correction is getting serious.
The Russell 2000 Index (RUT) closed today at 1292, down 34 points. Russell opened the week at 1411 and lost 8.4% this week, once again leading the overall market lower, just as it has been since early October.
The NASDAQ Composite index closed today at 6333, down 195 points, or 3%. NASDAQ broke through its February’s correction low at 6874 on Monday and has not slowed down all week. NASDAQ’s trading volume mirrored SPX, running above average all week and spiking today with quadruple witching.
SPX joined NASDAQ in breaking its February correction low on Monday, but Russell had already broken that support level last week. That effectively leaves market technical analysts without an obvious support level to watch for a bounce, signaling the end of this correction. It leaves us wondering, when will the market find the bottom?
The final estimate of third quarter GDP growth was reported this morning at +3.4%. The disconnect of our economy’s health and this market is remarkable. But four interest rate hikes this year are taking their toll. And the uncertainties surrounding the trade negotiations with China continue to worry investors.