Rebounding from a two-day 1,400-point plunge, the Dow Jones Industrials Average rose 1.15% or 287 points to 25,239. What was clear from the opening bell, when the Dow opened 350 points higher, then lost all its gains by midday, only to rebound again minutes from the close, was how incredibly manipulated the stock market based on cyclical profit-taking by the nation’s biggest funds. Two days before, the Dow dropped 823 points, followed a day after by another 500-point drop, only to watch the 350 point rebound on the opening the next day. All the headlines from Wall Street blamed President Donald Trump’s trade wars with China and Europe, the Federal Reserve Board’s rising interest rates and rising bond yields. Yet when you look at Wall Street’s sell off it looked a lot more like cyclical profit-taking, something the major funds do periodically to lock in profits.
Blaming politics for market sell-offs ignores the way Wall Street operates, where major funds control the lion’s share of trading, not private investors. When private investors wake up in the morning the market has already either risen or fallen, depending on the cycle. Taking profits allows bull markets to keep going by reducing share valuations, when share prices get too inflated. When markets get too frothy, sell-offs help return share prices to more attractive levels. Wall Street’s most recent sell-off dropped the Dow, Nasdaq and S&P 500 by about 4%, not anywhere near what’s called “correction” when declines approach 10% or more. With earning season about to start again, Wharton School economist Jeremy Siegel urged investors not to panic, seeing the recent sell-off as temporary. Siegel’s views were echoed by Allianz SE chief economist Mohammed El-Erian, seeing more economic growth ahead.
No one on Wall Street admits that cyclical profit-taking by nations biggest funds either rockets the market upward or spirals the market downward. Small investors have zero to do with today’s profit-taking trends, allowing funds to lock in quarterly earnings. Once markets hit new short-term bottoms, they typically rebound with buying-frenzies driving markets to new highs. Whether that happens this time around is anyone’s guess. But based on most economists, markets are poised for more upside, since corporate growth remains strong, especially as measured by the nearly record unemployment rate. Quoting Wall Street’s PR firms, pundits on radio and TV typically find any excuses for current sell-offs, finding the profit-taking motive gives Walls Street a black eye. Blaming market volatility on politics, geopolitical worries, the Federal Reserve or anything else are all excuses.
When it comes to the October “surprise,” Wall Street has seen since 1950 some of the biggest sell-offs during the yearly cycle. “October should be known for volatility, as no moth has seen more 1% change [up or down] for the S&P 500 Index going back to 1950,” said Ryan Detrick, senior market at South Carolina-based LPL financial. Detrick mentions nothing about cyclical profit-taking, giving the typical Wall Street party line that it’s due to forces beyond anyone’s control. “Historically, investing on volatility spikes leads to above-average returns in subsequent months,” Credit Suisse analyst Jonathan Golub wrote Oct. 11. Golub gets closer to the truth when he talks about buying stocks on market dips, giving funds or high frequency traders as chance to lock in some quick profits. UBS’s Keith Parker nearly told the truth when he said that sell offs make stock prices more attractive to investors.
Trump blamed Federal Reserve Board Chairman Jerome Powell for hiking interest rates too quickly since he took over the Fed Feb. 5, 2018 from former Fed Chairwoman Jane Yellen. Yellen, and her predecessor former Fed Chairman Ben Bernanke, dropped the Federal Funds rate to zero-to-quarter-percent Dec. 16, 2008, to help the U.S. economy recover from the Great Recession. Yellen started raising rates 25 basis points Dec. 16, 2016 to its current 2% rate, signaling eight rate-hikes in the last two years. If there’s anything that can tank the economy, it’s the Fed over tightening. “He’s gone crazy,” Trump said of Powell’s plan to continue hiking the federal funds rate. If rates get too high, it could, despite health corporate growth, tank the economy, leading to a downturn or recession. Of all the factors related to economy growth, none is more important than affordable interest rates.
Lurking behind the overall health of the U.S. economy are rising federal budget deficits, in part created because of rising interest rates. With the National Debt hitting $21 trillion, payments on the national debt have doubled, adding to growing federal budget deficits. If Power hikes rates too much, growing federal budget deficits could drag the economy back into recession, causing layoffs and spiking the unemployment rate, currently at 3.5%. Most economists see corporate earning as positive enough to keep the stock market rising for the foreseeable future. Periodic sell-offs help put stock valuations back within reach for institutional investors, causing markets to rise. Only Wall Street has a problem with admitting why cyclical profit-taking is a way of life to preserve profits for the nation’s biggest funds. Presidential policies, politics or global events rarely trigger cyclical profit-taking.
