The financial media gives out its reasons for the decline in the stock market this week. Let's look behind the media and take a look at what really might be driving the market down. This is from my client letter that I send out weekly.
Stocks That Make up the S&P 500 Are in Bad Shape as a Whole
According to CNBC.com, stocks haven't been doing so well. There are 500 stocks that make up the S&P 500. We know on a day-to-day basis how the index (all 500 stocks together) are doing. How about individually?
Two-thirds of the stocks in the S&P 500 were in correction territory or worse on Wednesday
There were 190 stocks in correction territory, meaning they have fallen by 10 to 20 percent from their 52-week high
Meanwhile, another 142 stocks were down 20 percent from that level, sitting in bear market territory
Here is what it all means - there is only a small percentage of stocks left in the S&P 500 that are keeping the stock market propped up. Yet, this has been the case for a long time. There are only a small percentage of stocks that are propping up the index and contributing to the growth of the overall stock market. That is never been a healthy sign. This week, you are seeing the rip cord pulled on those remaining stocks which led to the drop in the Dow.
Interest Rates Are Now a Problem for the Stock Market
Interest rates are being pushed up by the bond market in response to the Fed raising interest rates. This is the chief blame by the media why the stock market is running into problems. Yes, it is a problem. No, it is not the chief reason why the market is going down. This is a good example of the Media repeating what they hear analysts say on TV. One other observation, on Wednesday, both stocks and bonds lost money. That doesn't happen very often. Also, yesterday, the Dow dove over 500 points and interest rates were DOWN.
The Problem is China
Treasury Secretary Mnuchin said Wednesday morning that the ongoing trade war with China must include restrictions on currency manipulation. Most won't understand what that means. So, let’s drop to the bottom line. As I have said all along, China is not going to bow down and kiss the emperor's ring. They are going to fight even if it means taking losses. Their currency manipulation is one of their main assets in this war. Saying that any deal must include currency restrictions just widens the gap between the two countries. They don't call them trade wars for nothing. Wall Street is waking up to this as a problem....an unexpected problem.
Technical Damage Showing up on the Charts
The stock market charts are starting to show technical damage. This is a little preliminary. It is the same as trying to assess the damage done by hurricane Michael before it is safe to go into the area. I will keep you posted on this one.
Finally, the Trump Administration Looks like It Is Coming Unhinged
I don't know that he is going to handle even a simple correction in the stock market well, much less a bear market. He has always said some head scratchers. This week, he has openly again criticized the Federal Reserve Board for raising interest rates. First, a sitting President shouldn't be criticizing the Fed whether they agree or not with their actions. That is unprecedented. He said that they were "crazy." No, what is crazy is that the Fed waited so long to start raising them. Like it or not, raising rates is the best action to take. What are they going to do when we go into a recession? As stupid as this sounds - they need to raise them so that they can lower them when we do hit a recession and unless the business cycle goes away we will face a recession.
He also reassured that he wouldn't fire the head of the Federal Reserve Board. If that were to happen, then the market crash that would occur would be all on our President. There are a lot of thing I like about our President. What I don't care for is the constant spinning of the optics.
One final thought - there is something bigger that is spooking the market. We will know in due time. When the media can only come up with rising interest rates as an answer, there is something else is occurring that we don't know yet.
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Bob Brooks is a Financial Adviser who practices in the DFW area. He is also the host of the Prudent Money Radio Show. If you want to contact Bob please call 972-386-0384 and ask to speak to Judy. You can also email her at Judy@prudentmoney.com.