Yesterday’s arguably overdue correction appeared to be a combination of valuation concerns, the tariff challenge in the Supreme Court, and the more painful elements emerging from the government shutdown. The valuation concerns will continue, particularly the uncomfortable overweight of the biggest stocks, but the tariff and government shutdown situations should be resolved soon.
The U.S. market volatility spread around the globe, with the Korean going limit down before rebounding to down 2.8% and the Japanese down 2.5%. Europe dipped but has recovered most of the move.
Valuation concerns are not all U.S.-based; the percentage of major global indexes at all-time highs is the highest in 26 years. This is with global debt at all-time highs as well, which incentivizes central banks to reduce interest rates to reduce debt service costs. The currency growth that debt issuance creates pushes on inflation, which raises stagflation risks. Growth is essential to make the metrics work. In the meantime, a meaningful amount of excess liquidity ends up in equities, more so as yields fall, supporting the current high valuations.
This morning, we’re seeing the fall significantly from yesterday’s close of 19 to an overnight high of 20, and now down to 17.8. The flight to quality, now Mega Tech, finds the Magnificent 7 up 0.6%, though still down 1% for the trailing week. With nearly half of equities now in ETFs, buy orders translate into a material portion bidding up the top 10 names, now over 40% of the value of the market-weight S&P.
Yesterday’s correction included a major fall in crypto. traded below $100K, down 7% in a week, down 16% in a month. Ethereum is down 25% in a month. This is another example of risk-off sentiment, though crypto has a long history of major price swings.
Precious metals are seeing a rebound today as well, with back to $3,990 and over $48/oz. Copper is trying to hold onto $5/oz. and are flat on the day, with oil flat for the trailing month while natural gas is up 31% going into the winter heating season.
Interest rates are climbing. The 2-year US Treasury yield is up over 3 bps to 3.63%, the highest since the end of September. The 10-year is up 6 bps to 4.15%, the highest in a month. Bets for a December Fed cut have fallen to 59%, and a further cut in January to 21%. It’s not clear why the expectations are fading so much, but it seems likely to be a boost to equities if the cut is made in December.
Today is a meager rebound to yesterday’s pullback; the dip buyers haven’t arrived yet in force. We’ll probably need to hear about the tariff ruling to get a strong conviction for a move higher.