Is Today's Market Mania a Mega Meltdown?

Yesterday, the Dow roared and soared, and the Nasdaq screams and falls as money continues to roll rapidly out of high-tech momentum stocks and into value stocks, almost as if forced at gunpoint to turn over the money. The Nasdaq put in its worst performance in a year-and-a-half, while yesterday the Dow bested its own performance by more than it has in over a year. That kind of turnover is typically a sign that investors are seeing trouble for the economy and are gearing down. Perhaps, the stealth recession that no one wanted to believe in is becoming a little more apparent.

And to think it was the artificial intelligence craze that had everyone saying this couldn’t possible be like the dot-com bust in 2000 because AI sets a whole new paradigm for business so that companies involved in AI will change the world. Well, so did the internet in 2000 and companies involved in the internet. As I pointed out awhile back more than once, that didn’t stop those companies that eventually went very, very well from falling off a cliff first as the frenzy funneled out of the market, crashing those stocks so hard it took many years for them to recover.

We could be seeing the start of the same kind of long tumultuous slide here where, yes, some companies that are heavily involved on the leading edge of AI will do extremely well over the long term, but the earlier race by everyone to plunge in and consume those stocks was madness, and that mania has to get worked out of the market.

Within the S&P 500, information technology and communication services were the two worst performing sectors in the session. Notably, Meta Platforms tumbled 5.7%, while big tech peers Netflix and Microsoft dropped more than 1%. Apple slid 2.5%.

And Nvidia, the uncontested leader of the “Magnificent 7” plunged 6%. So, yes, the biggest of big tech, having just become the biggest company in the world by value, can fall of the cliff with the rest of the market and even lead the way down when the mania finally melts down.

Am I saying this is the point where the market crashes? Not with any certainty. This market has proved willing to return to its delusions many times over like a dog returns to its own vomit. However, I am saying this is the point that proves this market and high-tech AI stocks certainly CAN crash exactly like the market did in the infamous dot-com bust of 2000, and it kind of looks like it might be starting that plunge from its manic high now. If so, it might be too early for the Fed to save it with a rate cut in September if Powell is at all serious (and remains serious) about the hopes he is waving in the air to enrich markets with their fumes.

Powell knows it is too early to make a rate-cut decision now with really only a single blip down in inflation, though he optimistically tried to turn it into a three-month average that came down to make it sound more like a trend; but it was a three-month average where the downward movement came all in the final month. Not much of a trend!

Of course, the market’s moves could all be as benign as this:

“People are literally just selling some of the megacaps, taking some profits, and buying some of those more cyclical companies,” said Mike Dickson, head of research and quantitative strategies at Horizon Investments. “I would not be surprised to see this continue until earnings.”

Just profit-taking, but it is some pretty large profit taking, and looks more like a fearful rollover. Still, it could be just profit taking … I suppose. Even though Powell isn’t going to change rates before September, he could try to move markets by jawboning them full of hopes of a coming rate cut. He’s done it before.

The jawboning begins

We did get a little jawboning to help the market out. The Fed’s Waller, who had recently said rate cuts were months away because he’d have to see more consistent moves down in inflation, now says the central bank is getting closer to when it will make that first rate cut. Well, of course, every day it gets closer to someday when it will actually cut, so this seems like a statement intended to mean a little more than the obvious—intended, as it were, to deliver some hope to the stock market. Others at the Fed were suddenly all saying the same thing, having spent all their time saying the opposite thing in unison only a month ago:

Keeping with statements from other policymakers, Waller’s sentiments point to an unlikelihood of a rate cut when the Federal Open Market Committee meets later this month, but a stronger likelihood of a move in September.

A month ago, to a person, they all said rate cuts were going to be further off … until they got that down-blip in CPI for the latest month reported. Now, they sound like they are all in for a rate cut in September. Could that be because they fear they are really getting close to that point where we tip into recession? Here, the Sahm Rule that just beeped a recession warning and that is almost never wrong, could be coming into play in their minds, for it was written by one of their colleagues, meaning they are all familiar educated in it. (See: “What the Sahm Hill is Happening? Near-perfect recession siren is about to go off.”)

Federal Reserve Governor Christopher Waller on Wednesday suggested that interest rate cuts are ahead soon as long as there are no major surprises on inflation and employment.

I believe there will be major surprises, and I’ve written a lot about that lately, so you can comb through recent articles to find out what forces are at play. I won’t repeat them here for the sake of all those who have heard them often enough.

“I believe current data are consistent with achieving a soft landing, and I will be looking for data over the next couple months to buttress this view,” Waller said in remarks for a program at the Kansas City Fed. “So, while I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted.”

I believe that is called “taking the win.”

Only, is it a win? It may be premature to call it so.

It most likely is premature.

Waller outlined three potential scenarios in the days ahead: One, in which the inflation data turns even more positive and justifies a rate cut in “the not too distant future”; a second in which the data fluctuates but still points toward moderation; and a third in which inflation turns higher and forces the Fed into a tighter policy stance.

Of the three, he considers the third scenario of unexpectedly stronger inflation as the least likely.

I consider that one the most likely for the reasons I’ve been giving.

Waller’s comments on Wednesday are of particular note because he has been among the more hawkish FOMC members this year, or those who have advocated for tighter monetary policy as fears escalated that inflation is proving more durable than expected.

What can I say? They’re fickle. They get a single month where inflation moved to deflation by a minuscule amount and then average that across two months where it essentially didn’t move all along, and declare that a new trend because it’s spread across three months.

In May, Waller had said a rate cut was “several months away.”

Now he says labor has entered “a sweet spot” where it is softening (never mind that last report where the labor market tightened back up. At least, unlike Powell, he doesn’t try to stretch the dip from inflation to deflation into a three-month average but says we’ve seen improvement in inflation over two months.

“After disappointing data to begin 2024, we now have a couple of months of data that I view as being more consistent with the steady progress we saw last year in reducing inflation, and also consistent with the FOMC’s price stability goal,” he said. “The evidence is mounting that the first quarter inflation data may have been an aberration and that the effects of tighter monetary policy have corralled high inflation.”

And that may be the same kind of wishful thinking as “inflation is transitory.”

The comments also are consistent with what New York Fed President John Williams told The Wall Street Journal in an interview published Wednesday. Williams noted that inflation data is “all moving in the right direction and doing that pretty consistently” and is “getting us closer to a disinflationary trend that we’re looking for.”

That would actually be one month of “consistency,” and one month of no change.

Bond market proven to be the new dumb money

Following the article about Waller’s comments, I’ve posted a headline to a really good article by Wolf Richter, who points out how dead-wrong the Treasury market (the supposed smart money) has been every time it has tried to price in and predict the next Fed rate cut during this cycle. He presents a string of failures from the new “dumb money.” I recommend reading it if you think the bond market knows anything these days. It doesn’t.

All along the way, I’ve said, “No cut! No pivot!” Now, at last, we MAY be getting closer to when the Fed will cut. I haven’t quite decided if this is the turning point or not. Clearly the Fed wants to make it the turning point, but what I don’t know is whether the turn I’ve laid in for inflation to likely rise some more will happened before their September meeting and force them to pull on the brake to their new rat-cutting ambitions, which I suspect have risen because they are starting to feel the stealth recession.

Finally, as OpenAI CEO Sam Altman notes how an inch can change the course of the world history and nearly did (maybe half an inch) when a young gunman tried to steal the right to vote from millions of Americans, millions of Americans now say they fear the country is “sliding into chaos.”

Americans fear their country is spiraling out of control following an assassination attempt on Donald Trump, with worries growing that the Nov. 5 election could spark more political violence, a Reuters/Ipsos poll that closed on Tuesday found….

But 80% of voters - including similar shares of Democrats and Republicans - said they agreed with a statement that "the country is spiraling out of the control."

An entire nation that leads the world sliding out of control is a very scary thing, and it only took a single bullet to make that point sink in. While I’m not a Trump supporter, it would have been a massive travesty if millions of voters had been defrauded of their right to vote for the candidate of their own choosing by the trigger finger of one man.

The shooting brought back memories of turbulent political periods such as the 1960s, when Democratic President John F. Kennedy was assassinated in 1963, followed by the killing of Democratic presidential candidate Robert F. Kennedy in 1968.

Some 84% of voters in the poll said they were concerned that extremists will commit acts of violence after the election, an increase from the results of a Reuters/Ipsos poll conducted in May that showed 74% of voters having that fear.

These are among the major reasons—the others being mostly economic, war, and some social—that I said 2024 would be the “Year of Chaos.” We saw one side com mit acts of violence on January 6 when the ex-president tried to seize the election results in his own hand to make them—in Congress—what he believed they would have been (but had no way of actually knowing); now we saw another individual try to take the election into his own hands, which would have truly defrauded people of their vote.

Even 11% of Democrats believe Trump was “favored by divine providence or God's will." I’m not saying it was God’s vote for Trump, but I am certainly relieved the bullet missed, or it could have been the bullet that changed history, and history should not be changed by one man with a loaded gun outvoting the entire nation. That is far from what America is or ever was about.

God bless America. I think he did, by sparing us from the shot heard ‘round the world, which could have brought real calamity to our present hair-trigger nation.

"Thinking a lot about what a difference an inch can make to history," Altman wrote in an X post on Sunday.

"Hoping this can be a moment where we stare into the abyss and be grateful that there but for the grace of god went we, and collectively decide to turn down the rhetoric and find slightly more unity," he continued.

Altman also commended the Democratic Party's response toward the shooting: "I am happy to see most Democrats having the grace to step up and lead on this point, and resisting the urge to both-sides it."