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On Falling Knives and Forward Perspectives

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Tuesday, February 6, 2018

…Aaand the numbers just keep plummeting. This has been a period of “falling knives,” and plenty of investors who’d grown used to strong, steady gains in the market have been cutting their fingers all over the place. Dow futures now point to another -500 point shedding at today’s market open, virtually evaporating all gains for the year to date, and then some. We are right now -8.5% off our recent record highs.

Stock markets in Asia overnight have sold off — including the Hang Seng -5% and the Nikkei -4.7%, its worst single day since June 2016 — and European markets are all down 2% or more at this hour. Thus far in the U.S., no less than $4 trillion has evaporated from the market. Jay Powell hasn’t even been able to furnish his office at the Fed yet, and already he’s facing some very big decisions when the Federal Reserve meets next.

We also see a worse-than-expected trade deficit ahead of Tuesday’s opening bell, at -$53.1 billion roughly a billion dollars deeper than analysts were looking for, and even further than the -$50.5 billion reported last month. This figure looks to perhaps take another piece out of the 2.6% GDP growth in Q4 2017, which was already a few ticks lower than economists were expecting.

If there are any positive developments here at all, it is that the markets look to have been climbing out of this pre-market hole to some degree (the Dow had been projected to open as low as -725 points earlier this morning). At this stage, any momentum to the positive is more than welcome. And the 10-year bond, which spiked on Friday following a better-than-expected employment report, has been tempered due to this sell-off — from a 2.85% yield to around 2.73% now. (However, that the yield hasn’t plummeted along with the market tells us investments have not been directly transferring into 10-year bills as of this point.)

As we’ve been pointing out, the fundamental marketplace is just as strong as it was before this bloodbath started. Q4 earnings season has been stellar, with guidance forward on both top- and bottom-lines better than we’ve seen in years. And our main stock indexes are still between 15-23% higher than they were this time a year ago. So let’s keep some perspective while others are screaming at every new flip of a stop-loss switch.

Finally, we have plenty of Fed members taking to various podiums around the country this week, with St. Louis Fed President James Bullard this morning actually offering a glimpse of positive sentiment when he said higher wage growth will not necessarily spark inflation, which would then lead directly to much higher interest rates. And if it’s other opinions we’d care to seek, we’re in luck: San Francisco Fed’s John Williams, Dallas’ Robert Kaplan, New York’s William Dudley, Chicago’s Charles Evans, Philadelphia’s Patrick Harker, Minneapolis’ Neel Kashkari and Kansas City’s Esther George are all making public statements this week.

Mark Vickery
Senior Editor

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