After shedding 2,646 points or 14.4% since hitting a record high May 19 of 18,312, the Dow Jones Industrial Average rebounded today 619 points or 3.95%. Wall Street’s PR outlets attributed today’s good news to so-called bargain hunters, pretending small investors swoop up hammered down stocks. When you look at the 500- point rise at the opening bell, the orders from the nation’s biggest mutual, hedge and private equity funds came in well before any private investor had their morning Starbucks. When markets plunged over the last two weeks, Wall Street blamed it on the some 40% meltdown in the Shanghai Composite and expected slowdown in China’s economic growth. Expected to order less goods and services before a recovery takes hold, the Chinese Central Bank dropped its key-lending rate 0.25% to 4.6%, hoping to stimulate the sagging economy.
Nothing in today’s Wall Street rally changes China’s economy one iota, prompting German Bank Allianz SE Chief Financial Advisor Mohamed El-Erian Aug. 24 to predict that the market still has away to go down before hitting bottom. Today’s 619- point or 3.95% bounce was the third largest daily gain, since the Dow Jones Industrial Average gained 889 points, ending the Oct. 28, 2008 session at 9,112. After that whopping gain, the Dow plummeted to 7,949 by Jan. 20, 2009, President Barack Obama’s Inauguration Day. By March 9, 2009 the Dow hit rock bottom at 6,443 before turning upward for the last six years in the longest bull market in post WWII history. Before investors rush in to swoop up bargains, El-Erian cautions that valuations are still too high by historic standards. El-Erian expects another new bottom, trimming another 10% off major stock indexes.
Calling the Dow’s 619 bump, S&P-500’s 73-point or 3.9% gain to 1,940 and tech-rich Nasdaq’s 191-point or 4.2% rise to the biggest gains in four years distorts the nature of wild selling-and-buying funds in a volatile market. Nothing has changed in China or, for that matter, Europe where the economy remains stuck in neutral after bailing out Greece to the tune of $96 billion. Europe’s flood of illegal immigrants from poverty-blighted Africa and war-torn Middle East has stressed the European Union to the breaking point, giving rise to anti-immigrant right wing groups around the continent. No reputable economist believes that the EU has any answer for its economic woes that could lapse anytime into a stubborn recession. Watching Wall Street rocket upward shows the disconnect between profit-hungry mutual, hedge and private equity funds and global macroeconomics.
If funds really paid attention to macroeconomics, especially in China and Europe, they’d be a lot more cautions about arbitraging, or the process of high-frequency selling-and-buying or buying-and-selling. Triggering today’s 619 bump in the Dow were public remarks of New York Federal Reserve Board President William Dudley. Dudley said the Fed was less inclined or “compelled” to raise the Federal Funds Rate at its Sept. 16-17 Federal Open Market Committee meeting. Dudley’s statements mirror those of Fed Chairwoman Janet Yellen who’s leaning against a 2015 rate hike. Macroeconomic problems in China and Europe prompted International Monetary Fund Managing Director Christine Legarde to ask Yellen June 4 to hold off on any rate hikes. Most economists believe that if Yellen holds off on September’s rate hike, she won’t raise rates for the remainder of 2015.
When markets began selling-off after hitting a record high May 19, the market plunge was long-predicted by the nation’s leading economists. Yale University’s Nobel Prize-winning economist Robert Shiller, the creator of the Cyclically Adjusted Price Earnings ratio, had been warning about an overly inflated market since February. Former PIMCO co-CEO and Allianz Chief Advisor El-Erian warned recently of an imminent market sell-off. Neither Shiller nor El-Erian level with the public about how market-makers, like Goldman Sachs and J.P.Morgan, give guidance to high-frequency-trading mutual, hedge and private equity funds to start selling or buying shares. World or domestic events have little to do with Wall Street’s cyclical profit-taking when, as Shiller puts it, share prices get overly inflated and must come down. Without periodic corrections, markets can’t mover forward.
Small investors find themselves sucked in Wall Street’s dangerous riptides, where fast-paced mutual, hedge and private equity funds take profits when share prices get out-of-hand. Losing some $2 trillion in market capitalization since May 19, Wall Street doesn’t promise small investors a rose garden, only gives the nation’s biggest funds a sure way of locking in profits. When politicians like real estate tycoon and former reality TV start Donald Trump like to blame President Barack Obama for Wall Street’s cyclical sell-offs, he’s not doing the investing public any favors. When markets rocket back, you don’t hear the same partisan analysis congratulating the White House for a job well done. “I wouldn’t say it is full-blown panic,” said Brennan Miller, branch manager of Schwab in Chicago, reassuring investors that periodic sell-offs, no matter how scary, are good for Wall Street.
