Tin hats at the ready, US markets under pressure

When the Dow Jones Industrial Average index touched 26,616.41 on 26 January there was no indication of the volatility to come. While the next couple of days saw a pullback in the market, something many put down to profit-taking, Thursday, 1 February 2018 will go down in the diary of investors. A 600 point fall in the index was followed by a fall of over 1100 points and then we had the much expected “dead cat bounce” and then another 1000 point fall on 7 February. The US market currently stands at 24,190.9 which is a fall of nearly 2500 points since 26 January. What does the short term hold for US investors and their worldwide comrades?

Cost of finance

Since the US mortgage crisis of 2008 there is no doubt that the historically low cost of finance has fuelled investment in the stock market as well as real estate. The problem now is that inflation is set to spike in the short term and the interest rate cycle has well and truly turned upwards. Ironically, as a consequence of stock market volatility we may see a short-term delay in further US interest rate rises but make no mistake about it, they are coming!

Tin hats at the ready, US markets under pressure
Tin hats at the ready, US markets under pressure

These two concerns saw investors running for the exit door once the markets turned downwards. Bagging what was left of their profits, reducing their exposure and looking for safe havens has certainly been the name of the game since the market peaked. Ironically, even after one of the largest one-day falls in the history the Dow Jones Industrial Average index there appears to be little in the way of major concern about a “crash”. Many expect a “correction” to occur over the coming weeks but very few people are concerned about a “crash”.

Blind optimism/blind investment

There is no doubt that investors have been ultra-optimistic about the US economy even taking into account the many faults of Donald Trump. Ironically, it is this expected increase in US economic activity which has prompted not only the spike in inflation but also calls for further interest rate rises. In reality, markets had pushed too far ahead and taken too much for granted. A tweaking of the interest rate in America will increase the cost of finance and hopefully take some of the steam out of the economy and the rate of inflation. It does look as though there will be short-term pain for investors but a “correction” is not necessarily a bad thing. After all, it could just have saved the US stock market from going into freefall!

One of the main concerns is that there is still a deluge of funds to invest in the US stock market which are likely to be drip fed as the market weakens. This will obviously support markets to a certain extent and as and when markets do improve no doubt spectators will return and we could very quickly go back to the overcooked situation of today. There is a sense of blind optimism/blind investment in the markets at the moment with every fall seen as a potential buying opportunity. Perhaps, bearing in mind that nobody saw the “correction” coming, could the blind refusal to even contemplate a stock market “crash” lead to the unexpected?

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