Stocks Heading into Bear Market?

Yesterday’s stock recovery didn’t last long, with stock markets up dramatically in early morning trading. With stocks now having four days of closing beneath their 200-day moving average, we can now consider this a “decisive” move beneath this critical moving average. Although this doesn’t mean stocks won’t rally back and overcome this level in the near term, because that certainly is possible, it does mean that such a move is becoming less likely. The 200-day moving average will now serve as a ceiling of resistance that could prevent stocks from making significant gains. Since it has been several years from the last time stocks were in this position, this is not good news for stock investors. In fact, a decisive break beneath this level generally signals a trend reversal, meaning this could be the beginning stages of a bear market.

Considering the recent stock market declines of the past three weeks, President Trump has sharpened his criticisms of Fed President, Jerome Powell, and his strategy of continued interest rate hikes. In recent days, several critics have jumped on the band wagon, pleading for the Fed to hold off on future rate hikes. President Trump’s policies of reducing tax rates and corporate regulations have led to a hiring binge that has pushed employment levels beyond a healthy rate. Without the Fed countering the impact, we could otherwise see inflation numbers well beyond what is healthy. Further; to keep up with the increasing Federal budget deficit, which was fueled by lower tax rates, the amount of money the government is forced to borrow to meet its obligations is driving market interest rates higher. The lessons to be learned is that there is a counter balance to everything. If you want to over stimulate one sector of the economy, it must balance out by impacting another. With inflation being one of the most destructing components of a healthy economy, it must be countered with higher rates. With the US on the brink of a recession, higher rates and inflation are terrible. This seems to be where the current economic environment is heading.

If stocks continue to weaken, we could see mortgage interest rates improve. If you choose to float, do so only if you are able to keep a close eye on the market, as things can reverse quickly.