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Potential Cracks in the Market’s Armor

May 14, 2018

We’ve talked about volatility before…well, more than once…and it seems to be a more persistent topic as of late.

 

Does that mean we’re headed for a big drop?

 

Anything can happen, of course. But it’s possible for bull markets and volatility to coexist. And until the last few years, they did.

 

The recent dips, however, could be small cracks in the market and indicative of worse things ahead. Remember – bull markets tend to die slow deaths.

 

For instance, 2008 was a bad year. But the market peaked in October 2017, leaving many “warning” months most didn’t recognize.

 

Even in late 2008, the Bear Sterns collapse was followed by a rally because investors thought the worst was over.

 

Then six months later, Lehman Brothers collapsed. And it was still another six months until the bottom!

 

The lesson is, it’s possible to be in an unravelling market and not know it.

 

Are we there now? Three signs may say yes.

 

The first is cryptocurrency. People are crazy for Bitcoin. It’s the fear of missing out.

 

But crypto is volatile. In December, Bitcoin was at $19,000+. Today, it is less than $10,000. The all-time chart is “active” to say the least (source: Coinbase).

 

 

The second sign is bond yields. We entered 2018 knowing rates would go up and the Federal Reserve would shrink its bond portfolio. But after spending bills and tax cuts, the deficit is skyrocketing faster than expected. That's forcing the U.S. Treasury to sell more bonds, which puts even more upward pressure on bond yields.....while the Fed is already tightening. Higher bond yields, in turn, make stock dividends a less attractive income source.  Reduced buying interest will make stock prices fall.

 

The third crack comes from technology troubles, specifically the FAANG stocks – Facebook, Amazon, Apple, Netflix and Google (Alphabet).

 

Facbook is riddled with privacy issues. Amazon is fighting with President Trump. Apple’s iPhone sales have been lackluster. And Google’s ad sales and data collection practices have attracted bad press.

 

If these cracks worsen, look out.

 

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