Blog

Baby Steps

By Dwight Johnston on February 12, 2018 at 10:07 am

Remember 2008-2009?

The rebound in the Dow on Friday from -500 to +330 was enough to calm some fears in the stock market, temporarily at least. Dow futures are up 300 points in pre-opening trading, despite what is happening in the bond market this morning. Bond prices are lower with the 10-year at 2.885% after a close Friday of 2.855%.

Most business journals recounting the travails of the stock market last week were written in reassuring tones. There were few articles predicting an extended selloff. Still, you must wonder how many individual investors still remember 2008-2009 and might want to avoid that and still sell this week, assuming they came back to the market the past few years.

Too early to call

So, this morning it kinda, sorta looks like itai??i??s over, but itai??i??s too early to call. The rebound on Friday came as the S&P held and bounced off a ai???keyai??? level. But those chart traders often like to ai???retestai??? those levels to make sure they hold. If bond yields continue to rise, that might give them a reason to do just that.

This selloff is nothing like 2008-2009 no matter how much some analysts try to draw comparisons. The 2008-2009 selloff was grounded in deep financial and economic problems. This one is not. It is simply a fear that money wonai??i??t be quite as cheap as it used to be. If this selloff does compare to any other at all it would be the 2000-2001 experience, when stocks were over-valued and rates were rising. Though there are vast differences between then and now, we canai??i??t completely rule out the patterns and justifications are vaguely familiar.

Economic report releases

Assuming the stock market doesnai??i??t stay nutso this week, bond traders will be interested in the economic data on Wednesday. Both Retail Sales and the Consumer Price Index will be released. The CPI printout will be the one that bond traders will focus on.

I donai??i??t believe that whatever ailed the stock market has been magically cured over the weekend, but itai??i??s a start. All I would hope to see this week is less volatility. How about a good, old-fashioned trading range of 500 points or less on the Dow rather than 1,000? That would be a good first step in a recovery or adjustment process.

Both the stock and bond markets were overly complacent for years as traders were convinced the Fed would keep money cheap. The Fed finally started reversing its years-long policy of cheap money. Although the Fed started the process way too late, they did finally start with baby steps. Now the markets are going through the process of adjusting to a different, more fearful environment in which the Fed is less friendly and slightly less predictable. Thatai??i??s a good thing. Markets need to have an element of fear. Now the markets need to adjust the mindset, and hopefully that will come in baby steps too.

Opening market reads

  • The 2-year is 2.10%
  • The 5-year is 2.58%
  • The 10-year is 9/32s to yield 2.885%
  • The 30-year bond is lower by 8/32s at 3.17%

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