August 20, 2021
Good morning,
It has always been fascinating to me to see an entire market behave as a single normal person might under a particular set of circumstances. Wednesday afternoon’s sell-off was a good example of what is to me a phenomena. Educators will tell you that students often don’t hear a repeated message until they’re ready to. Something changes internally or externally for the student, perceptively, and Voila! – message received, a consequential behavioral change can be or is made.
The Fed, according to Fed watchers, has bent over backwards to prevent surprising the markets with any thought or action around tightening in the future. Wednesday’s Fed minutes release from a meeting that took place last month contained nothing the market hasn’t heard repeatedly from the Fed before. However, a seemingly ah-ha moment for equities and a 1+% selloff in 30min of trading was the behavioral change. The market mechanism is a fascinating machine (to me anyway).
Up until an hour before the U.S. market open this morning, it looked like another ugly open with the delta variant and more carnage in Chinese markets weighting down European markets overnight for the second day in a row. However, just like yesterday, the overnight sell-off has been met early by buy-on-weakness investors on our shores. The losses have evaporated.
The delta variant, Fed fears around next week’s Jackson Hole conclave, stalling stimulus expectations, peak earnings growth, mid-month blues, today’s option expiration – all unknown-knowns and catalysts to a market correction. A correction, which has already happened in the small cap value indexes (Russell 2000 is off 9.7% from it’s peak, -4% this week alone), but hasn’t yet materialized in the S&P 500. The offset to today’s laundry list of problems – massive liquidity still sloshing around the global economy and the fact that it has nowhere else to go except where it can enjoy a possible positive return – the risk-on assets.
Liquidity will diminish and normalized economic growth will return but when and how far in advance the market will price that in is everyone’s guess. I believe that ah-ha moment will show up in the tape indicators and we’ll change our investment behavior at that time. Hope you have a good weekend.
Be well,
Mike