Stock Market Sell-off: Trump Blames Fed, but Seasonality Also Factor

On Thursday, U.S. President Trump said that, “It’s a correction that I think is caused by the Fed and interest rates. ”“The first two weeks of October are historically biased to the downside – they are usually cleaning up a sell-off from September. We didn’t get much of one this year, but we are still in that negative two-week period,” Cashin said on CNBC’s Closing Bell.
James Hyerczyk
U.S. Stocks
U.S. Stocks

The daily charts indicate that stocks have essentially been under pressure since October 3 when U.S. Federal Reserve Chairman delivered hawkish comments about future rate hikes. At that time, the markets interpreted his comments to mean the Fed could become aggressive with the pace of its rate hikes this year and into next if it finds signs that inflation is heating up and threatening economic growth.

Due to the relationship between Powell’s comments, the rapid rise in Treasury yields and the steep sell-off in U.S. equity markets, the central bank chief has raised the ire of a few officials.

On Thursday, U.S. President Trump said that, “It’s a correction that I think is caused by the Fed and interest rates.”

Trump said he believes the U.S. central bank’s monetary policy “is far too stringent,” adding that “they’re making a mistake and it’s not right,” and saying he was “not going to fire” Federal Reserve Chairman Jerome Powell.

More Fed Blame

From an investment professional’s perspective, Richard Bove, chief market strategist at Rafferty Capital Markets, told CNBC early Friday:  “The Federal Reserve cannot, you know, set interest rates at such a high level when every other major central bank in the world does not follow.”

“It creates currency problems, inflation problems, interest rate problems and maybe recession problems in other countries and therefore, the flow of funds that was coming to the United States stops and I think that’s what’s happening right now,” Bove said.

Wall Street Veteran Blames Seasonality

A Wall Street veteran didn’t mention the Fed in his assessment of the current weakness in the stock market. Long-time trader Art Cashin said the market sell-off is partially seasonal, and partially a case of weakness driving further weakness.

“The first two weeks of October are historically biased to the downside – they are usually cleaning up a sell-off from September. We didn’t get much of one this year, but we are still in that negative two-week period,” Cashin said on CNBC’s Closing Bell.

“I think what you saw was a test and a failure … and I think that prompted a lot of people to say, ‘Oh my goodness, this is not what we’re used to.’ Support is supposed to hold and [stocks] are supposed to bounce. So the failure to bounce brought in additional selling,” said Cashin, UBS director of floor operations at the New York Stock Exchange.

“We saw the market go down and test various moving averages, various trend levels – and they tested successfully and bounced a little bit. Today they went down to those testing areas and failed,” Cashin said. “The selling brought in a bit of a domino effect, where the weakness led to further weakness. And I think that is why you’re down 600 and some odd points, too.”

Cashin said the drop is 80 percent technical. He attributed the other 20 percent of the sell-off to “foreign things,” like currencies and trade war fears. Cashin said he will be watching foreign markets to see if selling continues into Thursday.

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