The S&P500 slipped 0.74% last week, but it would have fallen about 2% had the week not been shortened by a holiday. While the actual stock markets were closed on Friday, the stock futures markets were open of about an hour and they fell well over 1%. Volume for the week was light, but would have soared if markets were open on Friday. And volatility jumped up almost 8%, which would also have been markedly higher had markets been open all week.
Momentum and breadth have turned down, and if equities do sell off on Monday, then they could even become oversold on a short-term basis. And the uptrend that began in October last year is still in effect.
So what caused equities to turn down? Precisely the two factors cited here last week—new signs that “Spain’s Pain” is expanding, and several ominous signs that the “US economy appears to be slowing down”.
Spain had a horrible sovereign bond auction causing yields to soar across the board. The 10 year bond is now rapidly returning to an unsustainable 6%. Spain’s real estate market appears to poised to crash; its banks are heading for insolvency. Its unemployment is soaring toward 25%, and its economy is rapidly contracting.
Most importantly, if these trends all continue (and they’re showing no signs of getting better), then Spain may soon require a sovereign or banking system bailout. There’s only one problem with that—unlike Greece, Spain may be too large to bail out.
Next, US macro news continued to disappoint badly. Only one piece of news beat expectations (ISM manufacturing) and only slightly. The rest missed. These included consumer spending, factory orders, ISM services, initial jobless claims, and consumer credit. The biggest headline miss of the week was the jobs report which came in almost 50% below expectations, lending support to the minority of analysts who argued that the US economy was never really as strong as it appeared early this year. Instead, the record warm weather pulled forward demand (and job creation) from the spring months. And now it’s payback time….and a return to reality, a reality which does not point to a strong recovery.
Adding to these market negatives was the release of the Federal Reserve’s minutes from its most recent meeting. Contrary to what all the market pumpers had claimed (that the equity markets were jumping because of organic economic strength, not because of an addiction to monetary stimulus), it does appear that stock markets are extremely dependent on the Fed’s money printing. Why? Because the Fed minutes hinted that further easing (eg. QE3) is not around the corner. And what did the markets do? The promptly fell.
So we’re left with markets that may fall further. If Spain’s (and Europe’s) woes continue to grow, if US economic growth continues to wane, if China continues to slow down, and if Japan continues to stagnate, and if the Fed continues to refrain from printing, then all risk markets will very likely suffer.
If so, expect the US dollar and Treasury prices to climb. And pretty much everything else to get cheaper—commodities, other currencies, bonds and stocks.
Risk markets had been grinding higher in the face of many warnings for several months now. Even without the headwinds outlined above, prices were very overdue for a correction. Perhaps now, they will return back closer to earth.
Expect many assets to become much more reasonably priced over the next two to four weeks. And the more prices fall, the better the bargains will be.