What's Going On With Stocks? Millions of 401(k) Holders Want To Know

With the 600+ point drop in the DOW yesterday many investors are understandably getting nervous. They are asking: What the heck is going on?  Is my 401(k) money safe or is it gonna vanish?

What we do know is that, mathematically, the latest stock drop has wiped out all the gains  for the year. 

The sell off, according to The Financial Times,  "was deepening all day and accelerated sharply into the close, with the S&P 500 and DOW Industrial average ending in negative territory for the year.".

Adding:

"And sending the NASDAQ Composite Index to its biggest loss in seven years, putting it on course for its worth month since the 2008 financial crisis."

Could what's happening now be the harbinger of the 50 percent  crash predicted back in January by The Utility Forecaster, e.g.
Well, we can't be sure, but we do know that historically, October has tended to be a terrible month in terms of stock investors' fortunes - from the great 1929 crash to the 1987 crash, and the infamous 2008 crash that hurled us into the Great Recession which took hundreds of billions of stimulus dollars to get out of - on account of massive credit freezes (owing to the spread of credit default swaps in mortgage bonds, other bonds).

In the immortal words of Adam Sender, chief investment officer of Sender Company & Partners:

"It's super ugly and who knows when it will be over."

Meanwhile, Max Gokhman, head of asset allocation for Pacific Life Fund Advisors, also quoted in the FT piece, is pretty certain the picnic is over. As he put it:


"There is definitely the fear that we are at peak earnings."

Meaning the only way for the market now is down. But what gives? What has seemingly and suddenly pricked the bubble? Well a confluence of factors, not least of which are growing trade tensions - especially with China, and increasing interest rates.   THis is being reinforced by the growing belief that the best days of the Bull cycle are in the past.

Beyond that, according to Michael Arone ('DOW Sinks As Threats To Markets Multiply' WSJ, October 19, p. B1), chief investment strategist for State Street Global Advisors:

"Strong earnings and economic data haven't been able to overpower geopolitical concerns."

He's referring here to the fallout with the oil rich Saudis from the Khashoggi incident, as well as the trade war with China, which also has the potential for military confrontation - i.e. with the U.S. recently testing Chinese mettle by sending two warships through the Straits of Taiwan.

Oh, and the midterm elections are also now looming large. Thus, the business community dreads a likely takeover of the House (which governs budgetary issues) by the Dems, because it may well mean an end to the current gravy train. More regs, fewer tax cut freebies.

Arone again (ibid.):

"Until we receive some clarity on on trade, monetary policy and the midterm elections, we're likely going to see this volatility continue."


Another problem concerns the behavior of the term premium on the 10-year Treasury bond. This is the additional yield investors demand for the risk of lending over long periods.   The problem is that if the terms premium keeps going up (i.e. becomes less negative), the acronym stocks (e.g. Facebook, Amazon, Alphabet, Netflix, Microsoft etc.)  will keep suffering as a result.   Well, this occurred yesterday as the FT observed (ibid.):

"Analysts said the selloff put pressure on richly- valued  tech stocks more broadly.  Investors dumped shares of technology companies, which have led the  market rally  in recent years."

In more detail,  just a simple return of the term premium to where it stood three years ago (before the Fed interest rate increases began) could easily jack up 10-year yields to 3.75%.  But a return to what used to  to count as "normal" could take it to 4% . Now, correct (discount) future profits back to today, i.e. at higher interest rates, and they are worth less.  This then hits rapidly growing companies more than the rest of the market because more of their profits are future- oriented. 

A third fact, call it a worry if you want, is that the stock market was already looking unhealthy from last month. Since the start of September smaller companies have been having a terrible time and bank stocks have fallen sharply. We know one big reason for the latter is that in the past year alone, according to the WSJ and FT, nearly $30 b has been pulled out of parked "no interest" accounts of large businesses, institutions. They  - the big depositors- were tired of getting nada while banks kept lending money out at higher interest, even after Fed rate hikes. This pullout of bank deposits and transfer to higher yield institutions, from banks like Wells and Citibank, have left fewer bucks for lending to the small fry.

The bottom line is that both effects suggest a lack of confidence in the economic outlook. Let us also note that more and more worries - especially concerning the nation's long term political stability- are now creeping in as this tumultuous an divisive election cycle reached its climax and particularly after the bomb threats exposed the past few days. 

The myth that the stock market rests in splendid isolation far above the tribal turmoil of national politics may have finally reached its end.  Well, it's about damned time.


Update:  As per the article (p. B12)  in yesterday's WSJ 'Business and Investing' section ('Moves in Lockstep Suggest Risk Ahead') no one who is sober should expect any uptick in stocks suggests the threat of a crash is over. As the piece observes:

"Riskier assets such as stocks and commodities are moving in unison as the market selloff deepens, a worrying sign for some analysist who believe it indicates more turbulence ahead.

Lockstep moves are a worrying sign because they signal excessive optimism or fear in markets. That means investors are largely buying or selling holdings all at once rather than weighing fundamental information like earnings or supply and demand.

Rising correlations often presage more drastic moves in either direction."

As I wrote in my Feb. 6 post  a lockstep  movement in asset prices can lead to a "multiplier" sell-off effect that would overshadow a normal correction, So if 10 percent is a normal correction and the DOW was initially at 25,000 or so, that would mean a loss (total) of 2500 points.    If investors sell - then flee to bonds and sell them too - that means a "multiplier"sell off and that's what triggered the nearly 1200 point drop of the DOW on Feb. 5th.  The takeaway? A much larger multiplier effect is yet to come, and The Utility Forecaster projects a 50 percent drop.