Why is Wall Street Confused?

In my previous post I argued that the valuations on some of the growth tech stocks that have recently tumbled were overpriced and that a correction in the market was necessary. As this correction has occurred over the past week its affects have trickled down to the entire equity market. Today the Nasdaq dropped 1.3% and the total loss for the week was 3.1%. The S&P 500 and the Dow each dropped 0.9% as well today. (WSJ – Stock Bloodbath Hasn’t Hurt Other Assets)

Despite the recent selloff impacting all equities, riskier asset classes that are often negatively affected by the US stock market selloff reacted adversely in the market today. Whenever the stock market takes a negative hit historically oil prices have fallen as well. This trend did not occur this week as oil prices rose.

 

 

As you can see in the graphs depicted above the price of oil has not moved in correlation with the falling stock market. This trend was also witnessed in emerging markets. As the market fell today the South Korean Won hit a new five year high and the Brazilian Real hit another monthly high.

This unique market movement shows that the dominant market force is currently the Fed’s commitment to maintain low interest rates. This new Fed view comes as opposition to January’s consensus that rates would be immediately hiked due to the strength of the domestic economy. New thoughts about the Fed have caused investors to reinvest into emerging markets and thus create a capital inflow into emerging markets, thus strengthening emerging market currencies such as the Won and Real. The new belief regarding domestic interest rates is also the factor that has pushed up oil future prices.

The current trend in the market is a signal that many investors don’t see this broad equity selloff as a long-term correction. After a high yielding year for tech stocks, many investors are using this correction as an opportunity to cash in profits and diversify their portfolios. Furthermore, the changing treasury rates has created an overall market confusion that has left many investors trying to find ways to make their portfolios more risk-neutral until further guidance.

According to Palisade Capital Management CIO, Dan Veru, “Money isn’t leaving the market, it’s just being reallocated.” (WSJ – Nasdaq Closes Below 4000) With no specific news affecting the market it would appear that this is the current sentiment on the street. With this all being said it would appear as if Wall Street is stuck in a bit of confusion. As the Fed continues to give contradictory forecasts and China continues to waiver, it is difficult for anyone to really know what exactly is going on in the market. For this reason, we may start to see a lag period where investors move their portfolios in order to mitigate as much risk as possible.

One thought on “Why is Wall Street Confused?

  1. haozhao

    I think your point is thoughtful and interesting. I also agree with the comment “Money isn’t leaving the market, it’s just being reallocated”. People just feel unsure about the market trend and want to harvest their profit in tech stocks. Overrall, the marklet has its own way of adjustment that can transfer fund from over heated zone into other places to prevent a bubble. However, this decline in stock market revealed one thing for sure: most investors are still quite conservative. This may not be a bad thing at all but it still suggesting that the market isn’t so strong yet.

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