Chinks in Wall Street’s armor start to appear at the frothy top of An aging bull market, watching the Dow Jones Industrial average drop 259.86 points or 0.75%, not a big deal relative to inflated price-to-earnings now at record highs. Joining the sell off today the tech-rich Nasdaq Composite dropped 105.80 points or 1.03%, also not a big deal with the average near record highs. But since the U.S. started coming out of the pandemic as more vaccines found their way to the public, Wall Street used that as a sign of a booming economy, rocketing share prices in the Dow, Nasdaq and S&P to record highs. Then came the hype about renewed inflation, prompting growing concerns about rising prices, but, along with that, a change in the Federal Reserve Board’s Open Market Committee [FOMC] policy. When the FOMC met in March, April, May and June the message was unambiguous.
Federal Reserve Board Chairman Jerome Powell, 68, told markets consistently that the soonest the Fed might raise the Federal Funds Rate was 2023, assuming the economy rebounded from the pre-and-post pandemic recession where GDP dropped in 2020 32.9%. Powell admitted while GDP was in freefall in 2020 that he lacked all the tools needed to deal with the Covid-19 global pandemic. Powell dropped the Federal Funds Rate to zero-to-quarter-percent March 16, 2020, recognizing the carnage to the U.S. economy from mandatory lockdowns. When Wall Street hyped the recovery in 2021 largely because the vaccines, the economy grew in Q1 by 11%, still 22% down from the pre-pandemic flat-line, meaning that the economy wasn’t doing well before the novel coronavirus created a global pandemic March 11, 2020. Powell admitted the future looked uncertain at best.
When you consider the pre-pandemic unemployment rate was 3.5%, jumping to 12% during the height of the pandemic, now settling at 7.9%, but only after 78-year-old President Joe Biden’s March 10 $1.9 trillion stimulus bill put $1,400 into the pockets of individual taxpayers getting up to $5,600 for a family of four. But with all the stimulus given to taxpayers, it didn’t take long for the stimulus to evaporate on monthly expenses, including food and rent, leaving the economy fizzling out. Treasury yields, especially the benchmark 10-year-bond on which home mortgages are based, rose in May to over 2.0%, then started crashing to today’s 1.296%, signaling that whatever stimulus did to rates, they’re heading back below the pre-pandemic baseline Jan. 8, 2020 at 1.78%. Wall Street has a short memory that Powell was already slashing interests rates in 2019 before the Covid-19 pandemic hit.
Former 75-year-old President Donald Trump complained when Powel hiked the Federal Funds Rate three times in 2019, hurting U.S. GDP where Trump had promised a 4% growth rate. Powell rates hike probably took about 2% off U.S. GDP in 2019, giving Trump less to crow about during the 2020 election. Now in what’s supposed to be a recovery year, the economy is still in a deep hole, with GDP at least 22% down from before the pandemic. New concerns over the new Delta variant have left markets uncertain about future GDP growth. “People have some concerns about how the Delta variant is going to play out in the economy, and we don’t know what’s going to happen to the spending with consumers once unemployment benefits run out in the September time frame,” said Julie Biel; portfolio manager at Kayne Anderson Rudnick. Wall Street doesn’t rally on real economic data.
When you look at Wall Street’s rising share prices, it’s rarely correlated with actual economic data, either from the Fed, Labor or Commerce Departments.. As the market surged in the pandemic year the Dow went from 28,823 Jan. 5, 2020 to 31,097 Jan. 4, 2021 while the GDP dropped over 32%, proving that a crumbling economy means nothing to Wall Street when the major funds want to drive the market higher. Once Wall Street sold off or corrected March 16, 2020, only five days after the World Health Organization declared a global pandemic, the Down dropped to 19,173 March 16, 2020. Wall Street likes corrections because the bigt funds get to buy back in a discounted share prices, riding the market to the next peak, until selling off again, not because of economic data or GDP but because that’ how Wall Street makes money, churning stocks. So going forward, traders are looking at another sell-off.
Today’s Wall Street sell-off has more to do with the crashing 10-year Treasury Bond, now sending a loud message to traders that the market’s overvalued and ready for a new correction. “The minutes do not suggest an imminent shift in policy. In contrast to the market’s hawkish interpretation of the June meeting and Summary of Economic Projections [SEP], the minutes show a more dovish Committee ,” said Steven Ricchuto, U.S. chief economist for Mizuhyo Securities. “This is a balanced Committee that is planning in the face of an uncertain future,” concerned that the rosy inflationary outlook was much Wall Street hype. Concerns about durable goods spending [furniture, electronics and building mateials] has been negative over the last three month, offset by better service economy, largely from government stimulus checks. When the Fed reads the tealeaves, the 10-year bond doesn’t lie.
