ETF Tracker StatSheet
WEEK ENDS WITH REALITY CHECK
[Chart courtesy of MarketWatch.com]
- Moving the markets
Reality made its way into the stock market with the major indexes plunging at first then staging a mid-day comeback only to dump again and close at the lows of the session.
As I pointed out yesterday, the Fed’s extreme dovish stance, along with worries about plunging yields, made traders ponder “what do they know that we don’t?” It appears that the answer can be found in a global slowing economy along with deteriorating data points.
Europe started today’s carnage when Germany’s manufacturing PMI crashed to 44.7 from 47.6, while economists were expecting a modest rebound to 48. That is now the third consecutive reading below 50, which indicates not only contraction but a recession as well.
This was followed by the U.S. Manufacturing PMI plunging to a 21-month low of 52 from 53 against expectations of 53.5, while the services PMI came in at 54.8 from 56 vs. expectations of 55.5. Maybe traders are now less puzzled as to why the European Central Bank (ECB) displayed an extreme dovish stance, just a few days before the Fed followed suit.
In fact, according to ZH, the yield curve is now inverted for the first time since 2007:
On six occasions over the past 50 years when the three-month yield exceeded that of the 10-year, economic recession invariably followed, commencing an average of 311 days after the initial signal.
While equity markets have been downright ignorant of this development, as well as the massive decoupling between stocks and bonds, today may have been a wake-up call. Well-known fund manager Jeff Gundlach had this to say:
“Just because things seem invincible doesn’t mean they are invincible. There is kryptonite everywhere. Yesterday’s move created more uncertainty.”
This makes it one more reason while it is critical for your financial well-being to have an exit strategy in place, despite the prevailing bullish sentiment.
Because, as we saw last October, market direction can unexpectedly change in no time, not only due to worldwide uncertainties but also because all bullish cycles will come to an end—eventually; and this one is way past its due date.