This week started off with doom and gloom.
At Monday’s close, the Dow Jones Industrial Average was down around 9% from its all-time closing high in October, while the S&P 500 had fallen 9.9% from its peak, just shy of the 10.2% February-April correction. That would have been the second official 10% correction within nine months, a rare occurrence.
But instead, stocks rallied big for three straight days. The Dow tacked on almost 1,000 points from Tuesday through Thursday’s close, and the S&P gained 100. The Nasdaq Composite index, which already was in an official correction (off 13.1% from its all-time high), advanced more than 5%.
The rally’s causes ranged from an oversold market through President Trump’s positive comments on a potential trade deal with China’s President Xie Jinping (though these were vague enough to be chalked up to pre-election posturing).
On Friday, there was more good news as the economy added 250,000 jobs in October, while the official unemployment rate remained at a decades-low 3.7%.
Yet by mid-afternoon, stocks were selling off again on Apple’s disappointing sales and earnings forecast and as investors realized a strong job market with 3.1% annual wage growth was likely to produce more rate hikes from the Federal Reserve.
So, is the three-day party over?
I think so.
The rally came on good but not great volume, and was probably fueled by algorithmic buying and short covering. Yes, the economy is doing very well, but as I wrote in my MarketWatch column this week, a big Democratic victory in the House in the midterm elections coupled with a “blue wave” of governors in key states would be a negative Wall Street hasn’t anticipated.
Also, I’m not sure there’s a trade deal to be had with China so easily, despite the president’s assurances. Our trade deficit with China has been growing, not shrinking, all year and is now in record territory. The Chinese economy is struggling, but anyone who thinks that’s going to make President Xie capitulate to Trump knows nothing about Chinese history or politics.
And another monthly jobs report like this in December would assure Chairman Jay Powell and the Fed hike rates for the fourth time this year at the next Federal Open Market Committee meeting. Ten years after the financial crisis, the federal funds rate is still barely above 2%, and three more hikes next year would get it only to 3%.
But investors have been spoiled by years of easy money; even getting back to what the Fed calls “normal” will be painful. It may not kill the bull market, but it will make the road rougher and the ride a bumpy one.