After years of Fed-induced market mania, analysts lost the neurological ability to fathom that stocks can actually go down.
According to the media, it seems Wednesday was a terrible day for stocks. The Nasdaq was down 1.6%. The Dow closed below the 50-day moving average, for some folks a key line of support. The Russell 2000 waded into correction territory by being down more than 10% from its July peak. Unlike before, it got stuck in it. The first major index to make that journey in a while.
Small caps have had a hard time. Many of them have gotten destroyed. But they’re small caps. They’re not in the Dow, and they’re not in the S&P 500. They’re too small to move the Nasdaq which is dominated by tech mastodons. But in the Russell 2000 with its focus on small caps, these stocks can have a little say.
That was the kind of day when the host of a radio news show rushed through the dismal market numbers and concluded with her cheery voice, “But analysts say there’s no reason to panic.”
The idea that someone might even think of “panic” and breathe that word into the microphone while on the air when the S&P 500 is down a whopping, breath-taking, dizzying, let’s see, 3.6% from its all-time high a couple of weeks ago – that is reason by itself to, well, panic.
Who are these panicked analysts that are whispering the word “panic” into the ears of radio hosts, at a time when the S&P 500 is down not 30% or 40% or 50%, but a mere rounding error?
Are these the same folks who, after all these years of Fed-induced market mania, lost the neurological ability to fathom that stocks can actually go down?
The idea that stocks can only do two things – rise slowly or melt up – is what the Fed has been teaching us since the financial crisis through its jawboning, supported by $3.5 trillions of printed money and nearly six years of zero cost of capital for Wall Street. It led to a trading philosophy that prescribes that every tiniest dip must be bought in order to stay ahead, a philosophy that has been relentlessly rewarded, so far.
It also led to a total lack of volatility, or more precisely, a lack of downward volatility, though there has been plenty of upward volatility, and no one complained about that. It has led to a now ingrained belief – or rather a proven fact – that this will go on forever. And if it doesn’t, by golly the Fed will see to it that it does.
But now that buyers forgot to, or failed to, or refused to buy that tiny dip for the first time in a while, the word “panic” makes its way into the radio news – even if she said that there was “no reason to.” Not yet. Maybe that was the implication.
Perhaps those analysts were worried that people might pay too much attention to small-cap stocks, which have been leading the rally, as they normally do, and which are now getting hammered. In May, the Russell 2000 already dropped briefly into correction territory by being down 10% from its March peak, but the day wasn’t up before the dip buyers barged in with fresh money, and it bounced back.
This didn’t happen on Wednesday. The problem with small caps is that they’re also normally leading on the way down. They’re a precursor in both directions.
Did dip buyers stay away because their nerves were getting rattled by the Fed’s promise to end QE over the next few weeks? The radio host didn’t say.
Or are nerves getting rattled because the Fed is publicly and privately fretting about what it calls “financial instability?” It’s the PC expression for highly leveraged asset bubbles and the havoc they wreak on the financial system when they implode. So the Fed has a wary eye on the ballooning leveraged loans and junk bonds, the all-out hunt for yield when there is none, the “stretched” asset values…. The Fed wants to tamp down on some of the maniacal excesses that it had encouraged for years. It’s talking about raising rates. It’s talking about macroprudential measures. It’s talking about tighter supervision of its bailiwick. The tone has changed.
The hyperventilation about markets declining a little recently is a clear sign that this has been a one-way street for way too long, that people have lost touch with the possibility that assets can actually decline in value; they’ve lost touch with it because stocks and bonds haven’t seriously declined in value for so long. And now, with asset values perched precariously in the rarefied air of high-altitude wishful thinking, folks have been spooked for a few moments out of that mind-numbing complacency – another catchword the Fed has been fretting about.
But what should be the scary thing is that this Fed-induced upward mania has been going on for so long that even erstwhile rational minds, after having been clobbered by the markets, have gotten tangled up in the notion that this would somehow last forever.
The high-yield party turns into a bloodbath. Happening right now beneath the surface of the S&P 500. Read… Junk Bond Bubble Cracks, Destroys Stocks One at a Time