Weak economic data from China set the stage for Friday’s big sell off in the stock market, as did the resignation of Greece’s Prime Minister, as “global shock” themes were clearly back in play. The Dow dropped 530 points, and while that was a little over 3% for the day, it did remind investors of the 500-plus point drop it experienced way back in 1987, when it fell 22%! It was a very rough week for equity markets, and it was tough to see stocks sell off into a Friday close that left the major indices sharply lower for the day and the week.
We saw weekly declines of 5.8% for the Dow, 6.8% for the Nasdaq and 5.8% for the S&P 500, and all of a sudden, the lazy days of summer felt a whole lot more like October. The Federal Reserve might be giving second thoughts to the September rate hike that it had been planning, so we will just have to wait and see how that plan unfolds. Apple (AAPL) was down more than 6% on Friday, and given its sheer size and market capitalization, it weighed heavily on all three of the major indices.
All three indices are below their 200-day moving averages of 17,638 for the Dow, 4,891 for the Nasdaq and 1,219 for the S&P 500, and that has technicians very worried. The fact that we sold off into the close on Friday was also a negative, and the bullish camp is looking desperately for a possible bounce. Weak Friday closes have become rare in recent years, so a Monday bounce might be just what bulls need to get this aging bull market back in action, but we will just have to wait and see what happens.
Fear levels soared on Friday, and we saw the Volatility Index (VIX) rise above 28; its highest level since May of 2012. The troubling part of the rise in the VIX was that it rose straight into the close on Friday, which is not exactly a bullish way to head into a weekend. Many professionals are on vacation, and for what is traditionally a quiet time of year on Wall Street is not so quiet at all. It suddenly feels a whole lot more like an October than an August, which could potentially cut a few vacations short.
What is strange, though is seeing companies like Apple (AAPL) and Exxon Mobil (XOM) falling in tandem. Big tech and big oil were weak on Friday, and Apple was down 6% for the day, and Exxon Mobil was down more than 3%. These are mega-cap companies that define the stock market, so seeing them under so much pressure is not a good sign for the broader stock market. These widely-held names are big parts of most portfolios, and seeing weakness in such names has rattled investors as they worry that if the big names are down, what could be next?
Throw into this mix the fact that the Federal Reserve still seems set on a September rate hike, and you can see why the stock market is already in Alan Greenspan’s “taper tantrum” mode. The Fed had been using the recent strong employment numbers as rationale for a rate hike, but with Friday’s decline in the stock market, it is probably reconsidering its hawkish lean toward a September rate hike. The odds are very good that “The Powers that Be” will have some of the Fed Heads talking positive about no rate hikes early next week.
The price of oil is sort of the “canary in the coal mine,” and we did see crude oil briefly dip below $40 per barrel. This raises huge concerns that the global economy is slowing down in a big way, and it is also weighing on investors’ minds. It is not so much as a question of “supply and demand” anymore, but rather a sign that the global economy might really be slowing to a halt. Chinese and Greek troubles are likely signs of a broader global slowdown, which likely fed into the market weakness we witnessed this past week
It has been years since we have experienced a major stock market meltdown, and that is why it suddenly feels so strange. The massive bailouts and QE programs have masked many problems since the Lehman debacle in 2008, so many market participants have forgotten that stock markets actually can go down. The tough part for the Federal Reserve is that interest rates are currently at or near zero, so there is actually little it can do if any sort of new crisis occurs. That is why it should have possibly started raising rates earlier this year.
Corrections or even “bear markets” of 20% are healthy for any stock market, but the plan over the past six or so years has been to avoid them. We could be seeing such a “correction” right now, and that is a normal part of a multi-year bull market. The Fed is set to meet in mid-September, so it clearly has its work cut out for it with this current market pullback. How it might justify a rate hike with all of the “global shocks” occurring is the big question for September, so we will sit back and see what happens.
That said, the Gorilla wishes each and all a wonderful summer weekend. This was a hard week for investors, and it is nice to have a break. This summer feels a whole lot more like a typical September/October time of year, so maybe things will settle down by that time of year. Late August is historically calm and quiet in the financial markets, but this August is turning out to be one for the record books. Enjoy the weekend, and we will be back in action on Monday for what promises to be an interesting week for investors.
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