Stocks were slammed on Thursday as if clobbered over the head with a lead pipe. The dull thud reverberated as investors — who had settled into a comfortable, low-volatility slide all year long — were suddenly jolted awake.
It boils down to this: The market will throw a tantrum until the Federal Reserve’s September rate hike is taken off the table.
Oil and China remain drags as well, with the Shanghai Composite down 3.4% overnight, as authorities continue to defend the 200-day moving average.
In the end, the Dow Jones Industrial Average fell 2.1%, as it dropped below the $17,000 level for the first time since Oct. 30, the S&P 500 Index lost 2.1% for its worst single-day loss of the year, the Nasdaq Composite lost 2.8% and the Russell 2000 lost 2.5%.
Investors are flocking to the safety of U.S. Treasury bonds and precious metals, while dumping shares of the “FANG” stocks that had supported the market for so long — Facebook Inc (FB), Amazon.com Inc (AMZN), Netflix, Inc (NFLX) and Google Inc. (GOOG, GOOGL).
The Gold Trust SPDR (GLD) gained 1.7% to push over its 50-day moving average for the first time since June. That was great news for the collection of precious metals mining stocks recommended to Edge subscribers, including Kinross Gold Corporation (USA) (KGC) and Barrick Gold Corporation (USA) (ABX), which are up 25% and 23% respective since added on Aug. 3.
Panic is in the air as well, as the CBOE Volatility Index (VIX) surged 25% to return to early July highs. That lifted the Velocity Shares 2x VIX (TVIX), recommended to subscribers, to a gain of 17% on the day.
Momentum favorites are rolling over for various reasons: from the fear of cord cutting with Walt Disney Co (DIS) to a too-honest conference call from Twitter Inc (TWTR) and worries over Chinese sales for Apple Inc (AAPL). As a result, the S&P 500 has sliced below its 200-day moving average and is at risk of violating the uptrend that’s been in place since 2011 at its 50-week moving average.
This, as you can imagine, is a big deal.
The S&P 500 hasn’t suffered a typical 10% correction since 2012 — the third longest rally since 1940. Bank of America Merrill Lynch recently warned clients that the relationship between high-growth momentum stocks and value had reached the highest since 2000. Market history since 1986 shows that when momentum breaks, these stocks suffer a loss of 25% on average.
There are larger, macroeconomic factors in play as well: From China (market volatility, currency devaluation and weak economic data), corporate earnings (from the drag from the strong dollar and falling energy prices), and fears of a possible interest rate hike from the Federal Reserve (which hasn’t happened since 2006).
Thursday’s selloff was driven, partially, by concerns over the latter after an initially dovish reaction to the release of the Fed’s July meeting minutes on Wednesday gave way to a more nuanced view. Sparing you the details, traders seem concerned the Fed could be mulling a rate hike at its Sept. 17 policy announcement despite a lack of progress on pushing inflation back to its 2% target.
The reason? This statement:
“Many participants indicated that their outlook for sustained economic growth and further improvement in labor markets was key in supporting their expectation that inflation would move up to the Committee’s 2% objective.”
Translation: Even if inflation remains soft, the Fed could pull the trigger on rate liftoff based on stable GDP growth and steady job gains.
The big question is, will the Fed ignore building financial market turmoil or be pressured into waiting? The Fed seems to be tilting towards an earlier rate liftoff with a pause afterwards (the “one and done” scenario for 2015).
However, the last time the Fed faced a cliffhanger decision, it blinked. Former Fed chair Ben Bernanke delayed tapering the QE3 bond buying purchase program in September 2013, after the bond market “taper tantrum” of earlier that year.
So it’s still anybody’s guess at this point.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
