Hello and What Just Happened?

Stocks markets are in free fall. They truly are. This has been a sudden reversal over the past week, and the primary driver is that obsolete, never was correct in the first place, belief that rates moving higher, mean the stock market must fall?

Some people think this is due to the millennials.

Those youngsters who know everything? Yes, well, they do know a lot, but unfortunately, they seem to be educated these days to believe there are rules that markets simply must follow. To get their degrees, they even had to argue that this was the case to their professors sufficiently well.

Send them into investment banks and that’s fine, as long as they are experienced real-world traders about to oversee their enthusiasm. As those at the top retire out however, the millennials have become a dominant force, and rather than being lead by experience, an age old human tradition, they believe they should get a vote on it. It, being everything. Which means they have increasing sway, out of proportion to their experience, in the media and research and strategy reports.

The result is they are pushing simplistic rules at all their clients, who increasingly are millennials as well. End result is a large herd of smart, but inexperienced people who have been poorly educated. No wonder disaster can strike.

This is certainly a factor, but to what degree we will never fully know.

One of the reasons seasoned traders around the world are raising this as an issue, is that the market has been selling down in the US over the past week or so on the basis of ever improving economic data?

If that doesn’t make sense to you, then you are one of the smart ones and you should stop watching the TV immediately.

The media is awash with end of world stuff again. Just as it was for Greece, Brexit and the list goes on. We, in the markets, have to let this process run its course and then look to jump on. We have suffered our share of pain however.

This is what you need to understand. There is reality. What is going on out there in the world. US and China data is incredibly strong pointing to further economic acceleration. Basically, the world economy continues to boom. Meanwhile, some big hedge funds, investment banks, and most traders have been lead to believe that a strong booming economy means higher interest rates and higher inflation, which means stocks have to fall. It is a rule apparently.

The only problem is that throughout history stocks have gone up with interest rates going up, because they react to the same stimuli which is the economy. Also, even recently, we have seen the Federal Reserve raise rates several times and the stock market has rallied over 300% to record highs continually. Yet, now that the long-term bond rates have started to move up, the media and bears have again tried to sell the same old failed argument.

They completely ignore that inflation is a different animal. With true competition, strong growth is clearly not creating much inflation at all. Furthermore, we are seeing rates rise gently by historic standards, but it seems sudden to millennials who have never experienced it before.

There is no real argument for this sell-off. Other than misled fear, can lead a lot more people into fear, and so the spiral of sentiment goes. In 1987, the market dropped 50% in a week, and then immediately went straight back up. The Dow Jones is down 10%. It is a big, sharp, ugly correction. That is for sure, but within days I would expect the market to begin to strengthen. No one will want to go home long stocks in Australia or the US today, so prepare yourself for more dire headlines over the weekend. That said, an absolute low is likely at any time now.

Some investors will continue to hesitate, but this is a very real and present opportunity.

Clifford Bennett