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Stock prices slid on Tuesday, 28 September, bumped through Wednesday, and fell again on Thursday, September’s last day, while the best bond yields in months also lured investors away from tech stocks.
Alphabet, Facebook, Google, and Microsoft, all of which have outperformed the broader market this year, each dropped at least 3.5 percent during the selloff, which shrank share prices in every S&P sector except energy.
Bond yields climbed on news that the U.S. Federal Reserve expects to wind down its stimulus programs and raise interest rates next year.
The return on the 10-year treasury note moved from 1.482 percent to 1.534 on 28 September, its highest since late June.
Higher bond yields burnished the dollar’s value, which gained 0.4 percent to mark a five-week high against a range of other currencies, according to the Dow Jones Dollar Index.
Until the September slide, the worst since March 2020, the S&P was up some 21 percent. Now as we continue to note, market strength will be tested as the Fed turns down the supply of cheap money. Again, with inflation rising and the Fed finally admitting to it, the Banksters will start raising rates… and The Street knows it.
Indeed, current inflation rates have not been seen this high in decades which is hampering economic growth amid shortages of materials, workers, and reliable supply chains.
Market Stumble
U.S. equities stumbled on the third quarter’s last day, with the Dow Jones Industrial Average shedding more than 500 points on reports of losses by a range of major companies from Caterpillar to Home Depot.
The Standard & Poor’s 500 index lost almost 52 points, or 1.2 percent; NASDAQ held its loss to 0.4 percent.
A variety of new data from the labor market, consumer confidence surveys, and other sources shows an economy still trying to find its footing.
Analysts are paring down their estimates for fourth-quarter and annual GDP growth as inflation, supply line jumbles, and the Delta virus persist.
Citigroup’s Economic Surprise Index, which measures by how much the economy over- or underperforms estimates, has sunk to its lowest level since June 2020, The Wall Street Journal noted.
Still, the S&P index has grown by 15 percent this year and remains close to its record close after managing a sixth consecutive quarter of gains.
Yet the index was off 4.8 percent last month, with 10 of its 11 sectors showing losses, and the Dow posting its worst month since March 2020.
This year, companies have usually managed to show strong profits despite rising costs and labor shortages; earnings for S&P 500 corporations have beaten analysts’ predictions by double digits every quarter since 2020’s second quarter, according to Morgan Stanley.
However, from June through September, 224 of the S&P 500 expressed concerns about inflation during earnings calls, FactSet noted, the highest number since the data service began tracking the number in 2010.
TREND FORECAST: As we have been forecasting, with inflation, materials shortages, unreliable supply chains, and scarce labor, the business sector will not sustain their past growth momentum. Thus, lower corporate earnings will drag markets lower.
TREND FORECAST: Now that the Fed has signaled its intent to stop spiking the financial fruit punch, investors will proceed more cautiously. The weeks of setting record high after record high are over; with the Fed getting ready to let the markets down gently, investors’ outlooks now must factor in the combination of surging inflation, interrupted supply lines, commodities shortages, and unfilled jobs.
Investors hoping to profit will need to be much more selective now and in the months ahead than they have been since summer 2020.
TREND FORECAST: The markets’ wobbles are bearing out a forecast we have made repeatedly, for example in “Market Madness” (12 Jan 2021) U.S. Market Overview: stock-buyers have been stoned on cheap money doled out by central banks’ artificially cheap monetary methadone.
We repeat our forecast made so often in the past: we are approaching a dramatic market selloff that will slam stocks, the housing market, and jobs, and spread the Greatest Depression ® far and wide.
Then and Now
Yesterday, the Dow dropped more than 300 points, the Nasdaq Composite slumped 2.1% for its sixth negative day in seven, and the S&P 500 fell 1.3 percent.
Today—despite the Federal Reserve Bank of Atlanta reporting that “The GDPNow model estimate for real GDP growth in the third quarter of 2021 is 2.3 percent on October 1,” a steep drop from 2 August when the forecast was for 6.3 percent growth—the Dow rose 311 points, the Nasdaq was up 1.25 percent and the S&P climbed 1.05 percent
So what’s moving the markets and why? Gregory Mannarino provides some unique insights in his article, “Understanding Risk in The Stock Market.”
Racket Squad
Overall, as we see it, the equity markets are a racket that have no relation to economic fundamentals.
The facts are indisputable.
Since March of 2020, when equities were plunging, the Bankster mob began to flood the markets with massive amounts of monetary methadone to keep the money junkies on their high. They lowered interest rates to near zero and began their $120 billion a month bond buying scheme that effectively poured money back into the markets.
Then there was the trillions of dollars of government stimulus that has artificially stimulated the economy and equities… and now that too is drying up.
And so overvalued are the artificially pumped up equities, they are trading at dot.com bust multiples. And speaking of the dot.com bust, nonfinancial companies have issued the most amount of speculative-grade loans to pay dividends in 2021, according to S&P Global Market Intelligence’s LCD that is well above the 2000 market bust levels.
TREND FORECAST: We maintain our forecast that when the Fed raises rates and cuts back on its bond buying scheme, equities, the economy and the real estate markets will dive. Thus, the higher rates rise and the less bonds they buy, the deeper they all fall. And as inflation keeps rising, so too will interest rates.
On the housing front, for example, home affordability has hit its lowest point in years. According to the Federal Reserve Bank of Atlanta, the median U.S. household needs 32.1 percent of its income to pay for a home mortgage.
Ringing back the dot.com bubble bust years, that is the highest level since 2008 when the mortgage outlay rate hit 34.2 percent.
We note this to continue to illustrate the “Bubble Reality” that is ready to pop.
Also, when interest rates go up, even less people will be able to afford to buy a home, thus further pushing up the home rental market.
Over There
Last week, in Europe , the continental Stoxx Europe 600 slid 2.2 percent, marking its third losing session.
Ignoring why and how Wall Street slumped yesterday, today, the pan-European Stoxx 600 closed up 1.2 percent, with the Bankster sector spiking 3.4 percent while tech stocks jumped 2.1 percent.
Over in Japan, the Nikkei 225 fell 3.5 percent during trading hours today and closed down 2 percent, dragging the index into correction territory… down more than 10 percent from its September high.
Concerns of rising inflation, disappointment with its new government, concerns over China Evergrande Group’s debt woes and worries of overall global economic growth have alarmed the market players.
GOLD/SILVER: The up and down bounce continues, with both precious metals still trading in the week’s long lower range. Pushed down as the value of the dollar went up, today gold was down $7, closing at $1,760 per ounce and silver was flat closing at $22.62 per ounce. Thus, the higher the dollar index rises, the more expensive it is to buy dollar priced commodities such as gold and silver.
However, we maintain our forecast that when the Fed raises interest rates, despite the dollar getting strong, inflation will still persist, which will in turn drive up gold and silver prices.
Moreover, when the flow of cheap money dries up, equities will dive and the economy will sink into deep recession. Thus, there will be strong demand for safe-haven gold and silver assets which will spike prices back to the yearly highs… and higher.
OIL: Been to the gas pump lately? Inflation worries? Prices are rapidly rising. Following the oil cartel’s agreement not to increase oil production, Brent Crude has hit a three year high and West Texas Intermediate rose to a seven year high. Today both were up, closing at $82.61 per barrel and $78.99 per barrel respectively.
TREND FORECAST: Go back to the Panic of ’08. As the economic collapse accelerated back then, oil prices spiked.
Once again history is repeating itself. We have long warned, when oil prices rise solidly above $80 per barrel, inflation will accelerate, the Fed will raise rates, markets will sink lower and consumer spending will decelerate.
BITCOIN: As we have been reporting, China banned all activity in cryptocurrencies and the U.S. Securities and Exchange Commission continued to explore a possible regulatory framework for them. Last week it was reported that the U.S. Treasury was drafting a report on stablecoins amid rising concerns that they could disrupt traditional money systems.
Bitcoin’s price fell below $43,000 after China imposed its ban but now has rallied back, at $51,443 as we go to press, even in the face of governments’ toughened stances.
Sales of Bitcoin and other non-fungible tokens peaked on 29 August at $267 million, then fell through September, totaling just $18 million on the 29th of the month.
TREND FORECAST: We maintain our forecast for Bitcoin to dive deeply if it goes below $25,500 per coin and rise sharply if it breaks strongly above $50K per coin and steadily maintains the above mid-$50K range.
It is now moving toward that range.
We also maintain our forecast that a major factor in forecasting the future price of bitcoin and other crypto currencies is dependent on government regulations. Thus, the more regulation, the lower the value of the coins, the less regulation, the higher the prices rise, especially as more small time traders keep jumping into the crypto market.
(For more on bitcoin and other cryptocurrencies, please see our “TRENDS IN CRYPTOS” section.)
SPAC CRASH
Investors are fleeing special-purpose acquisition companies (SPACs) in record numbers, pulling as much as 90 percent of the cash from SPACs’ trust accounts, in some cases, data service Dealogic reported.
SPACs, the hottest investment vehicle on Wall Street last winter, raised as much as $250 billion, by some estimates, before too many bad deals left a sour taste.
A SPAC or “blank-check company” is a special category of company that goes public, typically at $10 a share, even though it has no assets. When it has stockpiled enough capital in a trust account, the SPAC buys and merges with a promising company that is not ready to go public.
After the merger, the SPAC disappears, and its shareholders then own shares in the company the SPAC bought.
Because SPACs’ takeover targets are private companies that have not filed papers to make a stock offering, they can make unsupported, blue-sky financial projections about their future, which companies planning to go public are banned from doing.
As we have reported in “Gamblers Dump SPACs” (25 May 2021), several companies that came public through SPACs have failed to live up to their promise.
Share prices for Joby Aviation, a flying-taxi venture; electric-vehicle battery company Microvast; and 23andMe, the genetic testing business, were down 30 percent or more in May after going public in January.
Just two of 23 SPACs that announced deals in May were trading above their initial offering price in June, according to SPAC Research.
Now SPACs’ tailspin is accelerating.
In this year’s first quarter, 10 percent of SPAC backers redeemed cash, followed by 21.9 percent in the second quarter.
In this year’s third quarter, the average SPAC lost 52.4 percent of its cash, Dealogic said.
This year’s first quarter “will go down as the 2000 Internet bubble for SPACs,” an unnamed Wall Street investment banker told the Financial Times.
“There was a unique confluence of factors that drove that insane, risk-seeking behavior, particularly at a retail investor level,” the banker said.
Those factors included record savings rates among people bunkered against the COVID virus, giving them cash sitting in bank accounts at near-zero interest rates; and enthusiasm drummed up by social media.
SPAC promoters also claimed that young companies had a better chance of making a successful public offering through a SPAC than by navigating the conventional route through the U.S. Securities and Exchange Commission.
Experience proved that to be a spurious claim in too many cases.
From the date of its launch, a SPAC must complete an acquisition within two years or return investors’ money.
The pace of SPAC deals slowed over the spring and summer after the most promising companies had made deals and those that remained were riskier prospects.
TREND FORECAST: Because SPACs are losing their capital at a breathtaking rate, SPACs face two alternatives, both dismal: they can make bargain-basement deals with sketchy companies desperate enough to take them or the SPACs can return all their investors’ money and disappear.
We predicted SPACs’ demise in “SPACs: Here Today, Gone Tomorrow?” (8 Jun 2021) and again in “SPACs: Danger Ahead” (29 Jun 2021) and said that they would be hit among the hardest when markets corrected.
They also are being hit among the earliest.
It will be years, perhaps decades, before SPACs come back into favor as anything other than a rare tool used under special circumstances.