There were two competing narratives about just what happened on Tuesday to trigger the bloodbath we saw on Wall Street.
One revolves around politics and, more specifically, the GOP proposal to repeal and replace the ACA. The other hinges on technical factors as described by JPMorgan’s quant wizard Marko Kolanovic.
Kolanovic may be correct, but as we noted late Tuesday evening, it’s really, really difficult to ignore the fraught political backdrop and the psychological toll that takes on markets.
Indeed, we’ve been saying since the inauguration that markets will eventually run out of patience when it comes to stomaching the controversy in anticipation of growth-friendly policies like tax reform and fiscal stimulus. On Tuesday, it seems as though everyone said enough is enough, I’m selling.
At the end of the day, we like former FX trader Richard Breslow’s take. Namely that between Trump, the G20 debacle, a schizophrenic Fed, and geopolitical concerns, this is looking more and more like “death by a thousand cuts.” More below.
I rather liked what happened in the equity, and hence every other market, yesterday. Not from any sense of schadenfreude. Certainly not because I was able to predict it on the day. Although, I did hear a lot of broken clocks chiming a ballad to their self-proclaimed prescience. And hardly because this may hopefully be the alleged healthy correction that sets up the buy which will camouflage having missed the move in the first place. Benchmarks having become the bane of every fund manager’s existence.
- What I found interesting is how it was described. The explanations for why it happened now. And to be given a new opportunity to look at the charts and get a sense of what this could mean, where things might go and the places they’re supposed to stop
- Traders day-traded like this was the beginning of the end. While analysts assured that nothing had really changed. They’re both wrong to a certain extent
- The market didn’t collapse. It went down. In the scheme of life, this is nothing. On the other hand, death by a thousand cuts has to be acknowledged at some point. A failed G-20, geopolitical dangers not getting any better, easy assumptions about stimulus and tax cuts challenged and newly hawkish talk from unexpected locales, but not action, providing yield spread confusion
- An equally likely explanation is the technicals and internals for the S&P 500 just turned too stale for new money to be put to work at these prices. Surpassing the spike high at 2400 just became a bridge too far. If you want something really close to get a sense of whether this setback has legs or not, watch how it trades between 2300 and 2320
- The MSCI emerging markets index has been on an explanation- defying impulsive rise. Yesterday’s high is the momentum test. Back below 925 and we’d better re-examine all the buying spree theories that have spread such joy
- Gold’s pretty easy. $1200 is the pivot between sanguine and cautious. Back above the year-to-date high and something bigger is going on
- You can, and should, do this exercise broadly. Divergence only goes so far and not every asset gets the memo at the same time. And don’t forget to ponder why the Treasury two- year is still hanging out near 1.25%