Wall Street doesn’t seem to know what to think after last week’s roller coaster ride. Steve Schwarzman’s Blackstone Group says emphatically “This bull market is not over.” But Morgan Stanley says the market correction is “…just an appetizer, not the main course” of market trouble ahead. So who’s right?
I warned investors repeatedly for the two weeks leading up to February’s big pullback saying “the market is overdue for a pause of some sort” and that I was “concerned about the market’s overbought condition leading to a potential correction.”
I mean, it took just three months for the market to rocket from 23,000 to 26,000. You simply can’t have a run like that without the market needing to digest those gains.
But what should have been a normal pullback turned into multiple, gut wrenching 1,000 point drops thanks to a one-two punch.
You see, good news can be bad news on Wall Street.
And Wall Street got spooked by a triple-whammy of good news…
- A big payroll number from ADP that showed 234,000 new jobs created in January versus the 177,000 expected.
- Data that finally showed the wage growth the Fed has been desperate for.
- A model from the Atlanta Fed that predicted blockbuster 1Q GDP growth of 5.4%.
Fears that the economy might heat up too much sent bond yields soaring as Wall Street worried the Fed might have to more aggressively raise interest rates this year. And that sent the market tumbling and volatility soaring.
The VIX volatility index DOUBLED in just one day.
And that’s where things got ugly.
A pullback triggered by what we just talked about would normally have been much more mild. But it turned into a full-blown correction in no time flat because of yet another hair-brained investment product cooked up by pure greed on Wall Street.
A new breed of ETFs have emerged in the last year that are a play on volatility. These half-baked products were supposed to provide portfolio protection but instead blew up in investors’ faces.
One of these ETFs, the Velocity Share Daily Inverse VIX Short Term, lost 85% of its value overnight and was liquidated.
I don’t often agree with CNBC’s Jim Cramer, but he was right to blame this meltdown on “complete morons” on Wall Street. With $4 billion in these ETFs, systematic selling as these investments imploded turned a normal pullback into a 2,000-point panic.
But the good news is the market has recovered quickly and the underlying fundamentals driving the market are strong.
Earnings are the best they’ve been in 10 years. Positive earnings revisions are on a record pace. And thanks in large part to corporate tax cuts, analysts are now looking for 19% earnings growth this year.
The economy is healthy and growing. Unemployment is low. Personal income is up. Consumer and business confidence is high.
So let me be clear…this recent market correction was NOT the start of a bear market.
It was a healthy and much needed pullback after the market’s parabolic run the last four months.
BUT, don’t be fooled by the quick bounce back. Some very important things HAVE changed in the market. Click here to discover more about precisely what they are…