Today’s chaotic open has reshaped into another leg lower. Nasdaq is currently experiencing its worst year-to-year start in at least 30+ years. It is slightly worse than 2008, and the longest losing streak for a weekly since Sept 2020.
Importantly, the S&P 500 recently broke below its 200DMA and key support! The bears are definitely in charge.
Although it’s not the message you want to hear on Fridays, imagine this: An adrenaline junkie bungee jumping off Victoria Falls finds halfway through the fall that there is no cord attached to their hip. Stocks are heading for a similar fate warns legendary investor Jeremy Grantham.
According to Grantham, the S&P 500 is on track for a plunge by 50% that will bring it down to 2500. Grantham’s research is simple and fascinating. Stocks are trapped in a super bubble. This is a three-standard deviation movement away from the trend. This would be equivalent to a nasty shock that occurs less than one in 100 times during a jump for our bungee-jumping adventurer.
A number of traders believe that there is a market selloff underway. Due to an increase in Treasury yields, the S&P 500 has fallen 4% over this past week. Rising yields can indicate a weak future performance of equities. Sven Heinrich, also known as Northman Trader, said this week that a market correction before the Federal Reserve starts to lower interest rates in March could cause the Fed delay rate increases. He wrote that if there is a correction of 15-20% before any rate increases, there won’t be any rate rises in 2022.
Delaying interest rate increases would likely support higher inflation, and could cause a recession by implementing a more hawkish monetary strategy. Jay Powell, Fed Chair, stated last week that if high levels of inflation become entrenched in the economy and people’s minds, then we will have to implement a tighter monetary policy. This could result in a recession.
The Fed is trying to balance market conditions, inflation, and interest rates. One thing to consider is long-term impacts on the dollar. We believe that the dollar will continue to decline as other currencies, like China’s Renminbi, continue their erosion of dollar dominance. I am still waiting for updated data regarding the dollar’s foreign exchange reserves. It was last measured at 59% in 2000. This is a decrease of 71% from 2000.
The pilot program for a digital Yuan is still ongoing. It has deployed the rough equivalent of $14 billion dollars. As the central bank’s digital currency expands, the People’s Bank of China will be able to increase its financial and monetary power.
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