Stocks are once again down sharply in early morning trading. However, the stock charts show a strong floor of support not too far beneath current levels. The interesting thing about the dramatic drop stocks have experienced in recent days is that bonds have not had the typical benefit one would expect when stocks are under extreme pressure. This is not a good sign for the bond market, which typically sees a massive influx of money pouring in during times of stocks struggling. The concern will be pondering what would happen if stocks hit the floor and bounced higher. My guess is that we will see investors sell off bonds to jump into the stock market. That could temporarily hurt bond pricing, adding upward pressure to mortgage interest rates.
Markets are beginning to panic as many investors lose hope of a late 2018 year-end rally. It seems that investors are now more focused on preserving assets vs chasing high yields. This defensive approach seems to be a wise choice, as many indicators signal trouble ahead. Clearly, the Federal Reserve is watching what is happening. It will be interesting to see if the Fed will continue to hike short term interest rates. My guess is that if they do, December may be the last hike we see in the near term. Any additional signs of slowing should cause Central Bankers to hold off in fear of the US economy experiencing a hard landing.
As we wait and see what happens in the stock market, I’m beginning to favor a short-term locking bias.