Has the Great Bull Market reached its end?
So many voices may begin suggesting that the longest bull market in history has come to an end. However, we experienced a worse selloff last February when the S&P 500 fell more than 10% in – “correction territory” during seven trading days. Back then the blame fell on strong economic data after wage growth grew 2.9%, suggesting that inflationary pressures were building, and the Fed would need to tighten monetary policy faster.
This time around it doesn’t seem a lot different. The only difference is that the reaction to higher interest rates was a little delayed. Bond yields have spiked 40 basis points on the 10-year Treasuries since the beginning of September. This has called into question the valuation of many growth stocks, particularly Tech. It shouldn’t be very surprising to see this kind of reaction when the required return of equity, a key component in equity valuations, soars in a short time frame.
So far, we may describe the selloff as profit taking with many investors reconsidering their asset allocation weightings in their portfolios. Some investors will also be watching key technical levels, given that the S&P 500 is testing the 200 days moving average. This key support level has been tested three times in 2018 and managed to bounce again higher. However, a close below for two or three days may intensify the selloff for a couple of more days.
“The problem, in my opinion, is Treasury and the Fed. The Fed is going loco and there’s no reason for them to do it. I’m not happy about it,” said U.S. President Donald Trump
While I agree with President Trump that Wednesday’s selloff is the fault of the Fed, he should be reminded that the trade war he started with China and re-imposing sanctions on Iran is also to blame. His actions helped to build inflationary pressures and the Fed cannot stand still when it sees the economy overheating. A steeper selloff in equity markets will probably lead to a pause in hiking rates, but the Fed will be more concerned about the overall economic performance than just equity prices.