Yesterday marked the first meaningful move downward in the stock market in nearly 2 months. Things have been looking very rosy on the surface as everyone seems to have convinced themselves that the Fed party can go on for ever.
The problem with this thesis is that companies in the real world are encountering some serious headwinds. In just the past 2 days we've heard from CEOs of companies as diverse as Macy's, Walmart, Deere, and Cisco, all say they are operating in an increasingly difficult environment. These comments coupled with with the increasingly difficult situation in Egypt to knock 200 points off the Dow. However, I think there is more at play here. Back in June, the stock market started to get wind of a possible wind down of the Fed open market purchases and the Dow dropped about 500 pts in a few days. Chairman Bernanke quickly calmed everyone's fears by saying "Don't worry, be happy" and the market resumed it's upward march in the face of weakening fundamentals. Well, the chatter in the street is that the Fed is debating dialing back their purchases as soon as September. If you remember from the chart earlier this week - weeks with small Fed purchases = basically flat market performance.
The problem that the Fed has created is that the market feels the need for the Fed's involvement to move forward however, there actually is a declining need for the Fed to be involved as the Federal deficits shrink (yeah, I know it's sacrilegious to speak the truth, but Federal deficits are shrinking at a staggering rate thanks to increased tax collections). So what is the Bearded One going to do? My suspicion right now is that the Fed will attempt to pull back their involvement quietly but if the market starts to overreact (as it is prone to doing) the Fed may have no choice but to return with QE4EVER (Hmm, that would make a great vanity license plate on a new Bugatti).
Historically, the last two weeks of August have been VACATION weeks on Wall Street so I don't expect any meaningful activity between now and Labor Day but that could change if something gets leaked from the Fed.
Last night saw a wild move in the Shanghai stock market. While we were all tucked away snug in our beds a single mistake drove their stock market wild. The $2 trillion market jumped by 6% in a matter of SECONDS when a $1 billion order was placed (accidentally) at a local brokerage. These sort of flash smashes and flash crashes happen on a smaller scale every day in the US now, but to see an entire market move like that is unique. I've been in the midst of my summer Cormac McCarthy fix (author of The Road, All the Pretty Horses, No Country for Old Men among others) and days like this are when I realize that most global stock markets have become No Markets for Real Men :)