Markets were under heavy selling pressure on Friday, with major U.S. equity averages slicing below their 50-day moving averages with all the grace and finesse of a pig trying to fly.
There was no single factor for the decline, but a combination of factors, both here and abroad, the combined into a toxic brew.
In the end, the Dow Jones Industrial Average lost 1.5% as it was pushed back below the 18,000 level that has proved so troublesome in recent months, the S&P 500 lost 1.1%, the Nasdaq Composite lost 1.5%, and the Russell 2000 lost 1.6%.
The NYSE Composite Index, which broke above 10-month overhead resistance on Wednesday, was pushed back into its long sideways channel.
Things started in Asia as Chinese securities regulators moved to lean against rampant market speculation by unveiling on a ban on margin borrowing for certain stocks and allowing the increased use of short-selling (the preferred weapon of bear raids). That news hit Chinese equity futures hard, pushing them down nearly 7% at one point for the second-largest drop in seven years.
The troubles continued into the European session, where fears are growing over the specter of a Greek debt default next month — when payments of nearly $1 billion come due to the International Monetary Fund. Those fears pushed German government bond yields down near negative territory. As a result, the Germany’s DAX average suffered its worst decline in four months to top the worst two-day performance since the middle of December.
And as New York was preparing to open, the Bloomberg financial terminal network suffered an outage which greatly reduced market liquidity as institutional traders weren’t able to see price quotes or place trades. The United Kingdom even postponed a debt buy-back because of the blackout.
Traders were also concerned by the slight uptick in consumer price inflation, with CPI less food and energy rising to a 1.8% annual rate, since it could push the Federal Reserve to hikes rates sooner rather than later. It’s still below the Fed’s inflation objective, but movement toward that objective has reawakened some angst that the era of ultra-cheap money could soon come to an end.
And it was expiration day for April options contracts, adding to the general sense of nervousness and thinness on the tape.
Long-Term Picture Is Still Bright
The good news is that all this should prove to be just a temporary speed bump on the path to higher highs in the coming months, fueled by a growing realization that the first interest rate hike since 2006 isn’t going to come until the very end of the year. That was the catalyst the pushed the NYSE Composite higher earlier this week; and it’s one that will pull stocks out of Friday’s dip.
Societe Generale economist Aneta Markowska believes a June rate hike from the Fed is now off the table, moving the focus to September as the most likely candidate. Her reasoning is that, while inflation is stabilizing and the job market remains robust (despite a soft March payroll report), the Fed will wait to see a clear bounce back in U.S. GDP growth after a severe winter before acting.
Currently, the Atlanta Fed’s GDPNow real-time estimate of Q1 growth is tracking at just 0.1%; down from a high of 2.3% back in the middle of February. Markowska notes that much of the recent slowdown is weather-related. Growth is expected to accelerate strongly later this year as the chill of winter fades.
It’s worth noting that Markowska is more hawkish than the market, which assigns just a 45% probability of a September rate hike. A December liftoff gets a 70% probability.
Both the Fed and Markowska, as shown above, are well ahead of where the market is on their interest rate path. The Fed, as they did at their March policy meeting, are likely to continue to lower their expectations to more closely align with where market participants are — providing a boost to stocks in the months to come.
The Dow has technical support near its March-April lows, down about 1.2% from current levels. A violation here would put the December-February lows near 17,100 in play, which would be a drop of about 4% from here.
I’m looking for upside breakouts in names like Sprint Corp (NYSE:S), which is aggressively pursuing new subscribers with its cut-your-bill-in-half promotion. I’ve recommended the May $5 S calls to my Edge Pro subscribers.
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