1. Traders and fund managers with a shorter-term time horizon don't see any positive fundamental events in the next 30 days that are big enough to keep the market going up, and so they're selling and cashing in big gains since the stock market made a low back in August. Trump's infrastructure program is viewed as very positive but is now also expected to be about the same size as the market expected late last year, and so it is already priced into the market. Short-term fundamental news has become slightly bearish because the jobs report last Friday showed slightly higher wage inflation over the last 12 months than expected.
2. The Fed made two significant mistakes in the last two weeks: a) Atlanta Fed bumped up the forecast for first quarter GDP way too quickly all the way to over 5% and didn't give the financial markets time to adjust to a big surge in economic growth. b) the FOMC meeting statement released last week was significantly more hawkish than the previous statement, and that increase in hawkish language was completely unnecessary and signaled to the markets (incorrectly) that the Fed could get more aggressive about interest rate increases than is currently expected.
3. Uncertainty connected to the Tax Reform bill: There hasn't been a big corporate tax cut combined with a big personal tax cut since the 1980s, and thus market participants aren't sure exactly how the tax reform bill will affect the economy and don't really know how to price in the impact of the tax reform bill. Some of the areas of uncertainty:
a) How much will the corporate tax cut increase investment that improves the productivity of workers and keeps inflationary cost pressure under control?
b) How much will companies increase stock dividends and stock buybacks using the US tax savings and repatriated cash?
c) Is the personal tax cut going to spark a big sudden increase in personal spending that could lead to inflationary price increases, or will consumers use the tax cut more to pay off debt and increase savings?
4. High-frequency trading systems are making the stock market move too fast and are not giving human investors enough time to evaluate the economic and corporate fundamentals and make good decisions, and thus some human investors are selling, raising cash levels, and going to the sidelines until volatility declines and they have some time to figure out what they want to do next.
5. One-time, deferred profit-taking by individuals who delayed selling stocks until 2018 to get the lower tax rates on short-term capital gains.
The Trump Administration and the Fed need to calm the markets now. One of the Federal Reserve Bank presidents who frequently talks to the business news media needs to calm the markets tomorrow morning before the market opening and talk on television about a few subjects:
1) Price inflation is not a big concern at this time for a few reasons:
a) There's ample labor supply in the US economy because while the headline unemployment rate is low, the labor participation rate dropped substantially during the Great Recession and there are still large numbers of discouraged workers in the 18 to 60 year age group who can rejoin the labor force if they can get jobs. Many of them will need job training, and business and government need to work together to expand and improve job training programs. So uncontrolled wage inflation is not a significant concern at this time.
b) The tax reform bill will increase investment in new equipment that increases the productivity of American workers. See my earlier post on the corporate tax cut:
http://www.freerepublic.com/focus/f-news/3547417/posts
c) In the next two to three years, the corporate tax cut should allow most companies to increase wages at a higher rate than general inflation and pay for those increases from tax savings and productivity gains. After three years, wage gains above the general inflation rate will have to be payed for through productivity gains resulting from increased investment and improved job training. But inflationary cost pressures for businesses are not a concern for a few years because of the substantial drop in the cash expense of federal tax payments and an adequate labor supply.
2) Repeat the statement from the Yellen Fed: at the end of this tightening cycle the Federal Funds rate will be well below the typical rates preceding the financial crisis.
3) Very rapid GDP growth in the first quarter is not expected to continue at that pace for the entire year, but growth should be strong for the full year of 2018. Nonetheless, strong growth doesn't change our outlook for interest rate increases this year.
The Trump Administration and the Fed need to stop this fast-paced selloff and stabilize the markets quickly. This selloff is feeding on itself and they need to stabilize the stock market today-Tuesday. In the longer run, the Treasury Dept. has to take a long look at high-frequency trading systems and I'll post a comment about that subject later. But today the key goal should be to stabilize the stock market and slow it down to a much slower speed of price changes.
This is a Worldwide selloff of stocks.
A lot of the US headlines make it seem like it is just happening in the US stock market.
Let us hope Trump is on good terms with the Federal Reserve. There is no institution, agency or group that can totally cripple our economy and society faster than the Fed. The scary thing is that they’ve done it before. Read “The Creature from Jekyll Island: A second Look at the Federal Reserve”, by Edward Griffin. Best book I’ve read in 20 years.
THANK YOU for your incredibly comprehensive info
Could you post where that is from?
People will read all of the lies as to why the markets turned down sharply. It’s all lies. Here is a probable real reason: The Democrats pulled every string possible to manipulate our markets down for leverage in dealing with Trump on the budget deal coming up Feb. 8. Guess the pundits all conveniently forgot about that.
Main Reasons for this selloff are as follows:
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The Trump Administration and the Fed need to stop this fast-paced selloff and stabilize the markets quickly. This selloff is feeding on itself and they need to stabilize the stock market today-Tuesday. In the longer run, the Treasury Dept. has to take a long look at high-frequency trading systems and I’ll post a comment about that subject later. But today the key goal should be to stabilize the stock market and slow it down to a much slower speed of price changes.
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While trying to sound erudite and such, I’ve been investing for a long time, supply and demand laws can be manipulated...so, you think Yellen, who is part of Obama’s cabal has interest in calming the markets? Do you not think this is a coordinated attack by billionaire liberals?
In the real world of PDJT TDS, things like this happen. Foolish to think otherwise. Those things you list are academics...they happen and are thought to be causes, but only AFTER AFTER AFTER the triggers were pulled by the cabal. Yes, they have that much power and influence to affect supply and demand laws. Yellen, really???
Things will settle - thanks for the great analysis.
If you know what you are doing...you can make a killing during a crash. PLaying the volatility of the market can be fun too...