…then investors have had a pretty bad start so far and the million, nay multi trillion dollar question is – is this just the beginning?
The major global equity indices all plunged in unison on Monday by the most amount in months, declining to levels last seen before the taper announcement in December. Many commentators have laid the blame squarely at the door of the (sub)emerging markets but the simple fact of the matter is that collectively investors had gotten too bullish and rather too far ahead of themselves as detailed in this particularly prescient blog at the turn of the New Year – http://www.spreadbetmagazine.com/blog/titan-investment-partners-why-we-have-moved-to-a-maximum-net.html (and that was a lone voice in the wilderness at the time).
During the last several days, investors have grown increasingly anxious and nervous, reacting violently to small pieces of information and so ticking up volatility into the process – all classic hallmarks some 5 years into a bull run of a transition of trend. After a punchy 30% increase in US equity prices in 2013, helped in large part by the easy liquidity of the FED, it was just too much to sustain the bullish sentiment as pretty much every man and his dog was bullish.
If you look at the above table you will realise just how fast things change. Until mid January, markets were mostly flat and seemingly taking the taper in its stride. But, in just a matter of days, things got downright dirty and the main indices around the world turned significantly down for the year. The Nikkei tops the losers’ list with a decline over 14%. In a single session (yesterday), Japanese equities dropped 4% to record one of the worst February starts. Ever. The S&P 500 and the Dow are also in downtrends with declines of around 5.8% and 7.3% respectively. If January is a good barometer for the rest of the year, as investors like to believe, then 2014 is going to be a pretty tough year…
Wider technical signs have also turned bearish during the last few days with the Dow crossing below its 200 DMA and the S&P its 100DMA. As we also noted here () when we witnessed a 90/90 Downside Day in January – a measure that has been studied by Paul Desmond from Lowry’s Reports Inc () as being a very accurate indicator for market tops. If he is right, such a day marks the reversal of the bull market and is a warning signal for remaining bulls.
In terms of fundamentals, the situation is simple: what goes up, must go down, especially when the easy money fuel tank empties and gravity starts to reassert itself.
It was “Helicopter” Ben Bernanke who started the tapering of quantitative easing in December by cutting $10 billion from the program. A few days ago, in his swan song before handing over the reins to Ms Yellen another $10 billion was cut. After years of asset reflation, the worm is now beginning to turn. Financial assets are of course much higher as consequence of this program but where is the investment deriving from it, the real jobs, the increase in disposable income, the huge growth?
At the first signs of the FED halting its printing program, investors are running scared because they know the only mechanism that is helping sustain valuations is the asset purchase program. Without it, assets will likely decline again as the speculative money in the stock leaks. But, don’t worry! As soon as the wealthier start having trouble, no doubt Ms Yellen will revive the quantitative easing program once more to help them!