Since the beginning of this year, we have been warning of the potential for a correction. Of course, such warnings seemed pointless as the nearly “parabolic” rise in the markets seemed unstoppable. The chart below shows the current acceleration through the end of January.
But all of a sudden, something seems to have changed as the market stumbled this past week and has been unable to regain its footing.
So, what “woke” the markets?
Was it the sudden realization that Central Banks globally are reducing Q.E. programs? Or, that economic growth may be weaker than expected given recent numbers? Or, something else?
Whatever, the excuse turns out to be, the real culprit is seen in the chart below.
As I have been discussing “ad nauseam” over the last couple of years, interest rates are now stuck in a trading range that will likely remain between 0-1% during the next recessionary drag with a 3% ceiling as seen in 2014. Importantly, rates are at levels of overbought conditions only seen 3-times previously going back to 1980.
I am going to discuss this in more detail in this weekend’s forthcoming “Real Investment Report.” However, the point here is that since interest rates drive everything from borrowing, to spending, to capital investment – higher rates negatively impact economic growth. Since stocks are ultimately a reflection of the economy, it is hard to suggest that stocks will continue to rise in the face of higher rates.
Furthermore, higher rates are rapidly crushing the one argument used by bullish investors over the last eight years which has been “low rates justify higher valuations.” As I have repeatedly stated in the past, it is one argument that can literally change overnight.
Is this the beginning of the next major market correction?
There is simply too much exuberance currently in the market. It will take several failed rally attempts to begin to erode that base of bullishness.
But therein lies exactly what you want to look for. Rallies that fail at previous resistance levels, rising volatility and declining rates of participation.
As with every previous major market correction in history, investors were always given multiple warnings BEFORE the crash actually occurred.
(We have a special report coming out next week to our newsletter subscribers only discussing these warning signs.)
Of course, few investors heeded those warnings because they had been lulled into the belief “this time is different.”
It wasn’t then. It won’t be next time either.
Here is your weekend reading list.
You Should Never Time The Market?
Research / Interesting Reads
“Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.” ― Fred Schwed Jr.
Questions, comments, suggestions – please email me.