Since last week’s big sell-off, stocks have been almost literally up one day, down the next, and so on and so on.
As of last Thursday, the Dow Jones Industrial Average and the S&P 500 had both lost more than 6% from their early October all-time highs, while the Nasdaq Composite index had slid nearly 10% from its late August record peak—almost in correction territory.
Stocks bounced back Friday, sold off again Monday, rallied big time on Tuesday, and stayed there Wednesday before plunging again Thursday and closing mixed on Friday, with the Dow up and the S&P closing lower for the tenth time in the last 12 trading days. After all the ups and downs and to-ing and fro-ing, all three indexes are slightly above last Thursday’s lows.
The putative cause for last week’s selloff: rising ten-year Treasury yields, which topped out at 3.23% on October 8th. (The closing yield Friday was back to 3.20%.) This week, well, just blame the Fed.
Over the past week, the stock market has been hit by a hurricane.
Since reaching their all-time highs October 3rd, the Dow Jones Industrial Average gave up nearly 1800 points (or 6.6%) and the S&P 500 lost 200, for a 6.9% decline at Thursday’s close. The Nasdaq Composite index was off 175 points, or 9.6%, from its August 31st peak.
On Friday all three indices rallied nicely into the close as investors picked through the rubble for bargains. Clearly the Dow around 25,000, the S&P near 2,700 and the Nasdaq in shouting distance of 7,000 again were too tempting for bottom fishers to resist.
The selloff began with some remarks by Federal Reserve Chairman Jerome “Jay” Powell suggesting the economy was very strong and the central bank would keep raising short-term rates at a steady clip. It was a restatement of what’s been Fed policy for the past couple of years, but traders professed to be surprised. They sold off the ten-year Treasury note big time, sending its yield soaring to 3.23%, its highest in 7 ½ years.
The sudden jump in yield—it had settled back to 3.14% Friday—led to a mini-panic among investors who dumped both stock and bond ETFs. The Nasdaq lost almost enough to be in official correction territory (down 10%), while the Dow and S&P are well on their way.
So, is the worst over?
As of mid-week, the stock market was cruising along, with the S&P 500 poised to top its September 20th all-time high of 2930.
Then along came bonds—and Federal Reserve chairman Jerome “Jay” Powell.
At the Atlantic Forum, Powell told interviewer Judy Woodruff of the PBS News Hour, “The really extraordinarily accommodative low interest rates that we needed when the economy was quite weak, we don’t need those anymore…We need interest rates to be gradually, very gradually moving back towards normal.”
This was really nothing new—Powell and his predecessor Janet Yellen had said the same thing many times. But immediately, bond traders went into a selling frenzy, and the yield on the ten-year Treasury note, which had hovered above the magic 3% threshold, soared: As of Friday, the ten year yielded near 3.25%, its highest since June 2011. (Yields move in the opposite direction of bond prices.)
The Dow Jones Industrial Average plummeted 200 points Thursday and closed down another 180 points Friday. The S&P was off by almost 50 points, and the Nasdaq Composite index had plunged over 250 points in the week’s trading.
Is this a real danger for stocks?
On Thursday, the nation was transfixed by the searing spectacle of Dr. Christine Blasey Ford and Judge Brett Kavanaugh’s conflicting testimony before the Senate Judiciary Committee over Dr. Ford’s allegations that he had sexually assaulted her while both were in high school. (On Friday, the Committee voted 11-10 to confirm Judge Kavanaugh to the Supreme Court, and the full Senate will vote on the nomination next week, after a possible FBI investigation.)
But while time stood still in the rest of the U.S.A., it was business as usual on Wall Street. The S&P 500 index, the Dow Jones Industrial Average and the Nasdaq Composite index all posted modest gains on fairly light volume. The three indices were mixed on Friday, and remain close to their all-time highs.
Earlier in the week, stocks slipped a bit, but not much, from last week’s all-time Dow and S&P highs as talks broke down in the trade and tariff war between the U.S. and China, the world’s two leading economic powers.
On Wednesday the Federal Open Market Committee (FOMC) raised the federal funds rate for the third time this year, to 2-2.5%, and signaled it would raise rates again in December. And oh, yes, the yield on the ten-year Treasury note hit 3.1%.
Months ago, any one of these developments would have caused a big sell-off. Not this time. What’s different?
On Thursday, the Dow Jones Industrial Average rallied more than 250 points, notching its first record close since January 26th, at 26,656.98.
That marked the end of a nearly eight-month correction. The S&P 500 also hit a new all-time closing high of 2,930.75.
The Nasdaq Composite index, while gaining 1% on the day, was the only one of the U.S. Big Three benchmarks not to close in record territory. But it still finished the day above 8,000, only 80 points (or 1%) below its own late August all-time closing high. (The Dow and S&P continued to advance Friday while the Nasdaq slipped a bit.)
This comes the same week President Trump ratcheted up the trade war with China and threatened to put tariffs on all $500+ billion worth of Chinese imports if progress is not made in negotiations. Right now, those talks seem to be going nowhere.
It also comes in what is statistically the worst month for stocks by far: According to Yardeni Research, the S&P 500 averages a loss of 1% in September; the only other months that are in the red are February and May, which have average losses of only 0.1%.
So, what does that mean for investors?
Ten years ago the world ended. Only it didn’t.
On Monday, September 15, 2008, Lehman Brothers, founded in 1844, shocked the world by filing for Chapter 11 bankruptcy protection.
Over a frantic weekend of negotiations, the U.S. Treasury and Federal Reserve had failed to come up with either a rescue package or a buyer, so the fourth largest firm on Wall Street, with 25,000 employees, simply disappeared.
In the following weeks, the Fed and Treasury reversed course and bailed out insurer AIG and mortgage giants Fannie Mae and Freddie Mac, with help from a panicked Congress, which authorized $700 billion to purchase toxic mortgages securities from financial institutions under the Troubled Asset Relief Program (TARP).
To say those were scary days is a huge understatement. During the 1987 stock market crash, we worried it would be a repeat of 1929. Turned out the 1987 crash was the only bear market not followed by a recession since World War II. But 2008 was the real deal—a stock market crash, financial crisis, and a recession that was the biggest since the Great Depression.
What did investors learn from this near-death experience—or what should they have learned?
Thank God I’m an American!
That may sound jingoistic to some and overly pious to others, but in the real world of dollars and cents, well, it’s true.
While investors who were foolish enough to throw their money into emerging markets now race for the exits, amid 60% interest rates in Argentina, 18% inflation in Turkey, recession in South Africa, and a currency crisis spreading to Indonesia, even India, the U.S. economy is humming along.
In August, employers added 201,000 new jobs, slightly above the consensus forecast; the unemployment rate stayed at 3.9%, and average hourly earnings rose by 2.9% year over year.
That last stat got the most attention, because wage growth has long been the missing piece of this economic puzzle. As unemployment has plunged, wages haven’t followed. But if wage growth persists—a big “if”—that would be great news for the millions of Americans whose income has fallen behind.
Yet there’s a downside as well.
Finally, finally, finally the S&P 500 index closed at a new all-time record Friday.
Several times the large cap benchmark U.S. index tried to surpass its previous all-time closing high of 2872.87 of January 26th and several times it failed. But Friday’s close of 2874.69 did the trick.
In fact, it took seven months, or 145 trading days, for the S&P to recapture its previous high, nearly three times the length of the average correction. For all the fear and handwringing that produced on Wall Street and in the media, its biggest decline was a “whopping” 10.2%, just about the bare minimum you can have and still call a correction.
This week also marked the date on which this bull market became the longest of the past hundred years. But it needed to hit a new high for that mark to stand, too. Otherwise, market historians would have recorded the end of this bull on January 26th, because bull markets are measured from trough to peak.
OK, so now that that bit of record keeping is out of the way, what next? What does this bull market need to continue and even go higher?
While the Nasdaq Composite index rallied to hit record highs and the S&P 500 index came within 1% of its all-time peak, the Dow Jones Industrial Average never got within 1,000 points of its January 26th all-time closing high of 26,616.71. Until Friday.
That was when it closed at 25,687.38, its highest since February 1st. It followed a rollicking two-day, 500-plus point gain for the granddaddy of all U.S. stock market indexes. The S&P 500 also has mounted solid gains that put it within 22 points of its February all-time high.
Wall Street gurus attributed the gains to reports that the U.S. and China were restarting trade talks after both countries slapped tariffs on tens of billions of dollars of exports. The Wall Street Journal reported both sides want to reach a deal by November, just in time for—surprise, surprise—the U.S. midterm elections,
Technicians have been watching the S&P closely as it has twice tried and failed to break through that previous high. It would need to do that for this bull market, which on Wednesday will be, by some measures, the longest in the past hundred years, to continue.
So, how does the Dow fit in to that picture?