Getting that sinking feeling, Wall Street plummeted nearly 531 points, signaling the long-awaited correction has begun. Wall Street’s biggest mutual, hedge and private equity funds unloaded stocks, sending the Dow Jones Industrials, S&P 500 and Nasdaq plummeting over 3%, the biggest one day plunge since Dec. 18, 2014, when the index shed 421 points. Today’s Wall Street swoon doesn’t come close to the Sept. 29, 2008 plunge of 777 points, signaling the nation’s biggest funds mean business when it comes to taking profits. Individual investors can just sit back and enjoy the roller coaster ride wherever it winds up. When Wall Street sees a bottom hit, those same funds will just as vigorously buy back in, causing markets to rocket up. “It’s very clear that global growth is being questioned, and that China is front and center,” said Jim Russell, principal and portfolio manager at Cincinnati-based Bahl and Gaynor.
When Osama bin Laden decimated the World Trade Center and Pentagon Sept. 11, 2001, the Dow Jones Industrials fell 684 points when markets reopened Sept. 17. Today’s sell-off reveals profit-seizing instincts of the nation’s biggest investment banks and corresponding funds, deciding the China syndrome is the perfect excuse to take profits. With Europe rebounding strongly after the Aug. 19 Greek bailout, the European Purchasing Manufacturers Index [PMI] showed an EU in rebound, reflecting the euro’s strong rise against the U.S. dollar now at $1.14. Wall Street’s sell off while citing the China Syndrome clearly gives inflated markets an opportunity to sell-off. Showing that it’s only seasonal profit-taking, global gold prices only rose a half-a-percent, proving large funds aren’t jumping into commodities. If today’s sell-off signaled a long-term market meltdown, gold would have bounced.
Today’s anemic rally in the bond market, dropping the 10-year U.S. Treasury Bond only 1.4%, also shows that major funds kept their cash in money markets ready to buy back in when the market hits a new bottom. With Federal Reserve Board Chairwoman Janet Yellen not set to convene her interest-rate-setting FOMC meeting until Sept. 15, markets could drop lower until Yellen signals she’s holding off on a rate hike. “China is definitely slowing and what happens there matters. China is the largest consumer of many commodities, from oil to copper,” said Russell, diverting attention from Wall Street’s predictable profit-taking. Reputable market analysts, like Nobel Prize-winning Yale Economics Professor Robert Shiller, predicted with great certainty Feb. 14 that the current bull market was overdue for a correction, citing his Cyclically Adjusted Price Earnings Ratio.
Shiller and other reputable economists, not beholden to Wall Street’s market-makers and mutual, private equity and hedge funds, have said currents valuations needed to come back to earth. Market corrections allow Wall Street to offer shares at more affordable prices, something that keeps markets rising. Dropping 530 points or 3.12%, the Dow Jones Industrials showed the same vulnerability as the S&P 500 that dropped nearly 65 points to 1,970 or 3.19%, going well-below its 200-day moving average, losing a key support level. Taking the biggest hit today was the Nasdaq, plunging 171 points or 3.52%, showing tech stocks continue to fair worse during market sell-offs. “Investors are still trying to figure out yesterday’s carnage,” said Paul Nolte, senior VP and portfolio manager at Chicago-based Kingsview Asset Management. Nolte mentions nothing about Wall Street’s cyclical profit-taking.
Small investors tend to panic when the nation’s market-makers and biggest funds decide to take profits. No one knows exactly when market-makers decide to switch gears and go into a buying frenzy. While all fingers point to China, others look to Yellen to finally signal she’ll hold off on an expected federal funds rate hike. Profit-taking mutual, hedge and private equity funds don’t like their cash sitting on the sidelines too long. If Yellen signals that she’ll delay the expected rate hikes, market-makers, like Goldman Sachs and J.P. Morgan, will give thumbs up to funds to start buying back equities. Looking too far to China misses the big picture on Wall Street where current stock valuations were too inflated to go forward. Since hitting a market record May 19 of 18, 312, the Dow Jones Industrials has dropped 1,853 or 9.8%, just under what’s regarding as a “correction.”
Focusing on China’s slow growth and Shanghai Composite woes takes eyes off Yellen’s fateful decision about hiking rates in September. While China’s growth rate could certainly sour Wall Street, the real story has to do with profit-taking related to what Shiller calls the Cyclically Adjusted Price to Earnings Ratio. Shiller’s index showed that Wall Street’s stock prices were too inflated to move ahead without a major correction. If Yellen signals she’s reconsidered hiking the federal funds rate, Wall Street could turn on a dime upward in September. Looking at the big picture, major capital hasn’t flowed out of stock funds into bonds or gold, instead sits on the sidelines in money markets ready to buy back when the time is right. Improvements in EU manufacturing, especially recent strength of the euro, indicates Wall Street’s six-year-long bull market still has a ways to go in 2015.
