We are getting the big falls we expected. Stocks continue to tumble and this is likely the new dominant trend for some time.
At the start of the week, there is room for a technical price action bounce. There will be some bargain hunters. Both small investors and the largest funds. Yet, the trend has already turned with little prospect of a fresh bullish catalyst.
All the big catalysts and highest hopes of the bulls were achieved with the end to rate hikes in the USA. As suggested at the time, it may well have been a giant ‘buy the rumour then sell the fact’ event. Everyone who wanted to buy on such news had already bought in advance. Leaving the market vulnerable.
The follow up run of economic data has been less than encouraging, and the Federal Reserve has made it abundantly clear on numerous occasions that there will be no rate cuts for a very long time. Rates will stay here and the global economy is slowing. Further impacting the domestic dysfunction already self-evident in the US economy.
However, as I have stated on numerous occasions this is as ugly an economic matrix the world has ever confronted. Suddenly ramped up aggressive interest rate settings from the Fed and the ECB amidst a sharply slowing global economy with manufacturing clearly in recession across China and the USA.
I have said all this before. It is hoped people have adopted the various tools now available to every trader and investor to protect themselves against what is already considerable equity market downside from the recent peak.
What is particularly alarming is the slightly violent capitulation in some of the major stocks. Remember how I wrote how Apple could be another example of the the Tripple A tranches collapse in the Global Financial Crisis. When everyone who wants to buy what they believe to be the safest stock in the world has done so, trouble is never far away in terms of the stock price action. Add a slowing global economy to the demand outlook and the price vulnerabilities escalates.
Tesla has been a different animal. Both an industrial powerhouse of the future play and the ultimate feel good about yourself Meme trade play. The only problem being that EVs do more damage to the planet than petrol engine vehicles and this will increasingly be discussed more widely in the general community. Placing Tesla, a pure EV technology manufacturer, at a serious disadvantage over coming years.
All sounds a little dire, but my major concern is that the three major economic regions have serious problems, albeit slightly different in each case, all at the same time. Such a fundamental economic environment cannot possibly support the above average valuations and PE ratios recently seen.
Given the current US, EU and China economic matrix, the on-going geo-political risks, no sign of any help from the Fed or the US Administration for their economy, it is a wonder PE ratios are not closer to their historic lows.
Perhaps, that is where they are appropriately correcting to.
Market commentary from Clifford Bennett, chief economist at ACY Securities.
