Well the bounce didn’t last very long. After two weeks of modest gains, the S&P500 gave it all back—and then some—by plummeting 3.1% last week, with most of the damage coming on the psychologically important last day of the week: Friday.
Volume was moderate, which suggests that there was no serious capitulation selling. And volatility, while jumping 15%, was also nowhere near the panic levels reached in August 2015; the VIX index closed the week in the low 20s. Back in August last year, it jumped over 50, so when panic selling finally arrives, expect to see the VIX spike well over 30.
There was one huge economic report last week—payrolls. But first let’s touch on all the rest, which were mostly disappointing. Personal spending missed; personal income only met expectations. PMI manufacturing disappointed. ISM manufacturing also disappointed. Construction spending badly missed. PMI services missed, ISM services missed badly. Initial jobless claims were worse than expected. Productivity fell. Factory orders fell, but more than expected. Finally, the payrolls number was a disaster. Only 151,000 jobs were created instead of the nearly 190,000 expected. While the unemployment rate looked good on the surface, it actually masked the ugly reality that millions of unemployed workers have quit searching for jobs making them no longer counted as part of the workforce. If these people were counted, the rate would be around 10% which is a very ugly number, especially since it’s almost seven years since the last official recession ended. The other reason the jobs number was a lot uglier than reported was because while 151,000 new jobs were created, most of these were waitressing and bartending jobs, jobs with low pay and near-zero benefits. At the same time, more traditional high-paying manufacturing jobs have been seemingly permanently eliminated and shifted overseas.
To put it bluntly, the US stock market is on the edge of a more severe retreat in prices. Since the already feeble bounce lasted only about two weeks and then was followed by a big retreat in prices immediately afterwards, the US stock market must now either immediately bounce back—and more accurately, it must roar back—-or it will face a slew of scared stock owners who will look to get out before they lose any more money. Keep in mind that the S&P has now fallen back to levels last seen in 2014, and with just a little more retreat, it will be back down to 2013 levels. So a sea of recent stock buyers are extremely unhappy and increasingly becoming more fearful. If stock prices don’t roar back up immediately, they will begin to ignore their financial advisors’ pleas for calm and patience and will instead demand that they “get out” of stocks and quickly.
When this happens, it will fuel the big and sudden push lower in prices. This will be the catalyst that will drive the S&P500 down to a 20% loss, the level associated with bear markets, for the first time since mid-2011.
Back in 2011, the Fed came to the stock market’s rescue and not only prevented further losses, but drove the US stock market indices to all-time record highs.
The huge question asked by all Wall Street experts is this—will the Fed be able to pull another rabbit out of its hat this time, given that Fed funds rates are still near zero and that the Fed balance sheet is still ballooned to massive levels.
Many of these experts are concerned that this time the Fed will not be so effective.