Stocks look like they are set for a correction of some sorts after huge losses over the last few sessions that has left many bulls worried that the bull run may have come to an end. On Friday the Dow dropped over 600 points with the S&P and Nasdaq following suit. This morning Europe is catching the virus and is aggressively lower. The issue with this kind of fall is that it becomes a snowball effect, and after such astronomical gains since election day 2016 the falls can be equally as aggressive, but nobody could say that a correction hasn’t been due.
The big issue here is value, and has the value of the constituents of these major indices been manufactured by the tax plan. For a long time we have spoken about just what has been driving the positive earnings figures, and how they have potentially been a little inflated. So after outgoing Fed Chair Janet Yellen said that asset valuations are elevated it adds to the downside pressure and adds to the calls from analysts and traders talking the markets lower.
We also must remember that the Fed’s plan for unwinding the balance sheet and tightening policy would normally be a call for equity index downside. We haven’t seen this downside due to the positivity created by the President’s tax plan, the benefits of which have already been downplayed by the Fed.
Inflation is the battle ground, and if anything will be blamed going forward if the stock market downside continues it will be the potential strength in CPI towards the end of 2018. Both Kaplan and Williams of the Fed said they expected upside in inflation prices and warned that the US would face inflation pressures for the rest of this year. This points to members being cautious over the tightening going forward, but continuing with the plan going forward. Expectations are that we will see 4 rate hikes from the Fed in 2018 starting with a 25bp hike at the March meeting.
For the US open later this afternoon we are looking at a continuation of the downside with US futures pointing to the Dow opening another 130 points lower with the S&P500 down a further 12 points lower.
Sometimes you have to throw conventional wisdom out the door and just let the good times roll