click image to zoom The markets have seemingly experienced a “hard reboot.” The recent global selloff in equities and commodities indicate market participants are recalibrating. Markets do NOT respond well to uncertainty. Neither do they always necessarily function logically – emotion can become part of the process, too. Fear-contagion and a crisis-of-confidence hit the market hard.
The rapid, widespread selloff resulted from traders reassessing economic conditions and respective investment strategies going forward. The outcome being development of a dramatic “risk off” mentality – that’s resulted in a broad flight-to-safety and established a painful washout (with major exceptions being gold and cattle - more on that later). All of that’s made for some VERY busy, wild trade in recent weeks.
The overwhelming concern of late surrounds economic and political fragility. Most notably, concerns about slow growth are increasingly looming over the market(s). Simultaneously, the market had to battle worries (and frustration) over the United States debt ceiling resolution (not to mention the process) coupled with the chronic malaise about sovereign default in the European Union.
Meanwhile, consumer confidence, housing and labor (all inexorably intertwined) continue to be stumbling blocks for economic growth going forward. For example, Consumer Sentiment declined to 63.7 from 71.5 in June and the initial reading for August plunged even further to 54.9 (near the all-time low of 51.7 recorded in May, 1980). Simultaneously, the NFIB’s Small Business Optimism Index fell in July for the fifth straight month; expectations surrounding growth, or the lack thereof, and the overall business environment have been the major drivers of the pessimism.
click image to zoom Those types of indicators are converging and weigh heavily on convictions about the future outlook. And the FOMC August statement affirmed those concerns (while also lengthening hopes about the recovery horizon):
…economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.
As such, markets found themselves under intense pressure as traders began to price in each and every possible fear.