Down Day in the Market !

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Something baffling I noticed is usually on a sell off "safe havens" like Treasuries, gold, and short term notes should rise. But this time none of these are going higher. The 10 year seems to be steady at 2.85%. Gold is down. Rates are down very slightly. I guess no one is in a panic yet.

Unless all of the asset classes are in bubble territory. Has the 38 year downtren d in 10-year rates been broken? 10 Year Treasury Rate - 54 Year Historical Chart | MacroTrends

Remember, the "turd in the punch bowl" of our equities up up up party was when wages increased more than expected, thus increasing inflation expectations and driving the 2 year note to 2.8+%.

 

[audreyh1]

Something baffling I noticed is usually on a sell off "safe havens" like Treasuries, gold, and short term notes should rise. But this time none of these are going higher. The 10 year seems to be steady at 2.85%. Gold is down. Rates are down very slightly. I guess no one is in a panic yet.

It’s because rising rates are causing stocks to sell off. Of course bonds are down - rates are rising. Bonds rally a bit when stocks sell off strongly, but once stocks take a breath, the interest rates start moving up again, and the stocks start dropping again.

Until interest rates stop rising so fast, stocks aren’t going to be happy.

One month performance as of 2/8/18:

AGG intermediate bond index -1.72%

Vanguard Total Stock Market -5.94%

So over the past month VTSAX has dropped ~3.5X as much as AGG

Of course it depends on which day and which time frame, but short term moves in stocks can be much stronger.

 

[NW-Bound]

I think what started it was the unemployment and wage report that came out last Friday. The wage increase was 2.9% year-over-year. That drove the fear of inflation and higher interest rate. When some investors moved their money or started to hedge with options, that drove up the volatility index. That in turn caused the inverse index ETN to crash. There were stories of individual gamblers who loaded up on this inverse ETN and lost all of their stash.

That spook investors further, and the thing escalated. Joe and Jane Blow logged in to their 401k Web sites to sell. When in doubt, just sell and figure things out later. When they could not log in, that scared them more. Panic ensued.

The market being at the top after a continual long rise is precarious, from a technical standpoint. People have gains they want to protect. On the fundamental view, the market is also at a high valuation (P/E ratio). Investors are edgy, and when someone says "BOO", they jump. Pandemonium results.

The above is my interpretation from reading stories on the Web. I have no access to on-the-air or cable TV in this home to hear the explanation from pundits.

 

[HadEnuff]

I think what started it was the unemployment and wage report that came out last Friday. The wage increase was 2.9% year-over-year. That drove the fear of inflation and higher interest rate. When some investors moved their money or started to hedge with options, that drove up the volatility index. That in turn caused the inverse index ETN to crash. There were stories of individual gamblers who loaded up on this inverse ETN and lost all of their stash.

That spook investors further, and the thing escalated. Joe and Jane Blow logged in to their 401k Web sites to sell. When in doubt, just sell and figure things out later. When they could not log in, that scared them more. Panic ensued.

The market being at the top after a continual long rise is precarious, from a technical standpoint. People have gains they want to protect. On the fundamental view, the market is also at a high valuation (P/E ratio). Investors are edgy, and when someone says "BOO", they jump. Pandemonium results.

The above is my interpretation from reading stories on the Web. I have no access to on-the-air or cable TV in this home to hear the explanation from pundits.

All of those people who sold, still have to figure out where to put their money. Sure, interest rates are "up", but is that still where folks are going to want to keep their money long-term?

 

[W2R]

I must admit that I do not understand what is driving the violent swings in the market this past week.

I don't either.

Honestly, I don't think that anybody understands why markets move the way they do, although the income of many writers depends on coming up with causes for market movements that their readers will believe. There is a lot of "financial porn" being produced because it is a money-making business.

It's been said thousands of times, even on this board, but it seems unlikely that there is any individual who really knows why markets go up and down and behave the way they do. If someone did, probably they would be living the life of a billionaire rather than sharing these secrets with mere internet inhabitants like us.

 

[easysurfer]

On the market swings. I realized a long time ago, can't predict psychological behavior. So I don't try. Whether human or automated programed by humans.

 

[NW-Bound]

There is a difference between predicting the great market movements, vs. finding the triggering cause afterwards. Of course I am not talking about the usual small market daily movement. That's just randomness.

Wasn't the Great Recession cause known? That it was caused by the housing bubble, subprime loans, and CDO? Now, people including the regulators did not foresee that it would be so bad, but afterwards they knew the cause, right?

All of those people who sold, still have to figure out where to put their money. Sure, interest rates are "up", but is that still where folks are going to want to keep their money long-term?

To them, that comes after. When you think an earthquake is going to collapse your house, you run out to escape. You do not stop to think where you will be sleeping that night. My god, the market is collapsing! SELL!

If they think that the market is going down big, they try to front-run their cohort, then buy back when the market stabilizes at the new lower price. But when more and more people get scared like that, it builds up like an avalanche. The thing feeds on itself. Fear becomes reality.

 

[audreyh1]

I must admit that I do not understand what is driving the violent swings in the market this past week. It seems that a derivative security designed to respond to changes in volatility is actually driving that volatility. And, in an even more bizarre set of circumstances, driving the trading value of actual equities whose changes are the measure of that volatility.

The violent swings are due to the derivatives. Derivatives have very unpredictable effects.

What set it off was a sudden change in outlook due to rising wages. Plus interest rates have moved up very fast over the past month and the stock market had kind of been ignoring it. Last Friday’s employment report may simply have been the straw that broke the camel’s back.

When things got unstable, some derivative investments crashed. Things like this can snowball, but it doesn’t necessarily mean there are underlying economic problems. But with an extremely overbought market, it was very vulnerable to such a selling event.

 

[audreyh1]

All of those people who sold, still have to figure out where to put their money. Sure, interest rates are "up", but is that still where folks are going to want to keep their money long-term?

When folks panic they aren’t thinking long term.

 

[HadEnuff]

The violent swings are due to the derivatives. Derivatives have very unpredictable effects.

What set it off was a sudden change in outlook due to rising wages. Plus interest rates have moved up very fast over the past month and the stock market had kind of been ignoring it. Last Friday’s employment report may simply have been the straw that broke the camel’s back.

When things got unstable, some derivative investments crashed. Things like this can snowball, but it doesn’t necessarily mean there are underlying economic problems. But with an extremely overbought market, it was very vulnerable to such a selling event.

I think many investors think the market is "over-valued", after all, that's what we all hear, and when we look at historical PE ratios, we are in bubble territory. But most investors want to be "in", to some degree, because it may be even more over-valued tomorrow, but many have their fingers right on the sell button, just waiting to time that moment when the market realizes it's over-valued. Or they protect their run-up values with stop-losses which then get triggered.

I think we all knew this was coming, just not when. And we all know it probably isn't over.

 

[NW-Bound]

I think we all knew this was coming, just not when...

Yes. There you go.

Stand a bottle on its head. An unstable system. Start to shake the table. You cannot predict exactly when it's going to topple, but it's gonna happen.

Anyway, in the days ahead, the market will jump around a bit as people don't know if it's coming or going. I don't either. For fun, I will try to do short-term trading to see if I can pick up a few thousands. Not that much money, but I hate the mob, and will try to do the reverse of what they do. If I end up losing a few thousands, or find that it's not fun, I will stop.

The above is just trading on the side of my long-term core holding. If I fail, it's small change.

 

[audreyh1]

I think many investors think the market is "over-valued", after all, that's what we all hear, and when we look at historical PE ratios, we are in bubble territory. But most investors want to be "in", to some degree, because it may be even more over-valued tomorrow, but many have their fingers right on the sell button, just waiting to time that moment when the market realizes it's over-valued. Or they protect their run-up values with stop-losses which then get triggered.

I think we all knew this was coming, just not when. And we all know it probably isn't over.

Hence the snowball. It’s like a game of musical chairs.

Personally I’m glad to see a big shake up and get some of that complacency removed, and get a little fear into those inexperienced investors.

 

[HadEnuff]

All of those people who sold, still have to figure out where to put their money. Sure, interest rates are "up", but is that still where folks are going to want to keep their money long-term?

When folks panic they aren’t thinking long term.

of course! what I should have said was they will eventually have to figure it out, which is why I think that as long as interests rates are even close to what they are now, investors will feel compelled to re-enter.

 

[NW-Bound]

Stock valuation (P/E) usually goes down if and when interest rate rises. People who sell may be able to buy them back cheaper. If that happens, they get the last laugh. I won't.

 

[audreyh1]

of course! what I should have said was they will eventually have to figure it out, which is why I think that as long as interests rates are even close to what they are now, investors will feel compelled to re-enter.

When interest rates get high enough, some folks decide to hang out in bonds instead.

I think there were folks piling in who hadn’t had experience with volatility. They got a little taste of why equities aren’t clear sailing.

Although memories sure are short! That Dec 2015 to Jan 2016 was pretty nasty and scary. Folks sure forgot about it quick though.

 

[audreyh1]

Stock valuation (P/E) usually goes down if and when interest rate rises. People who sell may be able to buy them back cheaper. If that happens, they get the last laugh. I won't.

Yep.

But I’ll ultimately be rebalancing, so it’s OK.

 

[NW-Bound]

I have a different reason to hold my shares though.

If a $100 share you hold now is repriced to $90 due to P/E contraction, you have lost $10. I do not see how rebalancing will help.

 

[audreyh1]

I have a different reason to hold my shares though.

If a $100 share you hold now is repriced to $90 due to P/E contraction, you have lost $10. I do not see how rebalancing will help.

So when the price drops rebalancing means you buy more of it from your other assets such as cash of bonds if the bonds haven’t dropped as much.

Sure timing is superior. But we know how incredibly difficult (impossible?) it is to sell all at the top, wait the right amount of time, and buy at the bottom. But folks won’t stop trying to do jut that.

 

[NW-Bound]

Rebalancing may help going forward, but when your shares have lost their values, buying more of new ones does not bring up the value of the existing shares you have now. They are still stuck at $90.

At this point, the shares are already down 10%. If they are stuck there at $90, you and I have lost. It's too late for market timing. We already miss it. The sellers have won.

 

[audreyh1]

Rebalancing may help going forward, but when your shares have lost their values, buying more of new ones does not bring up the value of the existing shares you have now. They are still stuck at $90.

At this point, the shares are already down 10%. If they are stuck there at $90, you and I have lost. It's too late for market timing. We already miss it. The sellers have won.

The sellers only win if they get back in before prices go back up above where they sold. And if what they wait in yields as much.

Not that many timers sell at a local top. Many sell on the way up. Many sell way too early.

 

[NW-Bound]

If I were one of those who sold, I would buy back now, and have 10% more shares. In another thread by RayinPenn who sold a bunch earlier, I showed that he could buy in now and got 4.5%.

But all that does not mean anything. If people who bail never buy back, it's not my problem. I did not sell, so I do not have to worry about buying back.

What I was trying to say is perhaps the market has priced in the higher inflation rate and the lower P/E. If so, it's not a correction, meaning it will not bounce back. It's here to stay. Damage is done.

At this point, I will just stay in. Maybe the pricing action is overdone, and that the stocks do not deserve a 10% haircut. Maybe the earnings will improve sufficiently this year to keep propelling the price forward.

People should be content with the price in the immediate future being where it is now. It may not bounce back.

 

[HadEnuff]

When interest rates get high enough, some folks decide to hang out in bonds instead.

I think there were folks piling in who hadn’t had experience with volatility. They got a little taste of why equities aren’t clear sailing.

Although memories sure are short! That Dec 2015 to Jan 2016 was pretty nasty and scary. Folks sure forgot about it quick though.

agree, but I don't think interest rates are high enough to make people happy parking what they pulled out of equities there for very long. Between not making enough to offset inflation, and the risk of principal in the face of future interest rate hikes, I think they'll hope for a quick dip, and then buy back in.

I think. Maybe.

 

[NW-Bound]

In order to remind myself the effects of interest rate/inflation on the stock P/E, I looked at the historical chart for both.

In 1980, I paid 14% mortgage rate for my 1st home. The stock P/E then was around 8. Good grief! God forbid if we ever come back to that point.

But the low interest rate that we have had in the last decade is not normal. If it returns to the historical average, then should we not assume that the P/E will also get re-normalized? To its average value of around 16?

Everybody hopes that it happens gradually over a number of years to avoid shock to the system. Don't get confused: there is no market timing or rebalancing to counteract this. This is what Bogle and Shiller have been preparing us for a while.

In an interview in Oct 2017, Bogle was thinking that this P/E contraction will subtract 2%/yr out of the stock return on the average for the next 10 years. The market is never orderly however. Did it just take out its pound of flesh for the next 5 years? Now that it already happened, I hope the monster is satisfied for a while. And that's why I am staying in the market.

 

[marko]

I have been watching the market minute by minute for this whole move. My gut feeling is this is something major. I hope I am wrong. I fear the worst may be ahead of us.

For many of us this could soon be the buying opportunity we've been long waiting for. Hang in there. This should all settle down in a week or so IMO.

 

[NW-Bound]

One more thing I forgot to mention about P/E: effect of expected growth.

As of Oct 2017, the expected earning of the S&P was such that the 2018 forward P/E is 19. Barring any calamity that prevents that from happening, the recent price cut of 10%, if it stays, means the forward P/E will be 17.

That's reasonable. Another reason for me to stay.