The Federal Reserve has inflated an asset bubble and that’s going to damp market returns, perma-bear Marc Faber, publisher of The Gloom, Boom & Doom Report, told CNBC Tuesday.
Faber’s remarks follow downbeat assessments from the likes of former Pimco co-chief executive Mohamed El-Erian and Nobel economics laureate Robert Shiller, who have recently spoken on the increasing odds of a US recession and frothiness in stock markets, respectively.
“Say you’re a young person and you’re just starting to work. So take me in the 1970s. In the U.S., with 20 hours of work, I could buy the S&P 500 (.INX). Now you need more than 90 hours of work to buy the S&P 500 if you’re young, with a medium income,” Faber told CNBC in an interview.
“The Fed has basically created with their colleagues in Japan and at the European Central Bank (ECB) and the Bank of England (BOE), they’ve created a colossal asset bubble. And the returns going forward will be disappointing.”
Global central banks have created easy liquidity in markets via zero interest rate policies, and sometimes negative-rate policies, as well as through asset purchases. That’s driven up prices across a range of assets.
Despite Wall Street’s gains Monday, Faber noted that the gains are not evenly spread among stocks.
“The composition of an index is that it’s usually capitalization weighted. So one stock that goes up vertically could theoretically drive up an index and 99 percent of the shares don’t make new highs,” Faber said. “We had a strong day on Wall Street, but on the New York Stock Exchange, out of more than 3,000 shares that are being traded, only less than a hundred made a 12-month new high. The advance is very narrow.”
He’s seeing the same action in the art and property markets.
“Some markets are still strong, but the bulk is no longer moving up so the advance of asset price inflation has been narrowing significantly,” Faber said.
But while Faber is known as Dr. Doom for his pessimistic outlook, this time he’s not entirely alone, with a chorus of other voices also growing concerned.
On Monday, economist El-Erian put the risk of a recession in the United States at 25 percent to 30 percent.
“The road we’re on is going to end. We cannot rely on central banks, and central banks cannot be the only game in town when it comes to policy,” El-Erian, who is the current chief economic advisor to Germany’s Allianz (ALV-DE), parent of Pimco, told CNBC.
In September, Yale professor Shiller told CNBC that investor sentiment is looking similar to conditions just before the dot-com bubble popped in 2000, possibly signaling a bubble. Other analysts have called time on various asset classes, including property, high-yield bonds and technology stocks.
Stocks plunged on Monday, closing off session lows in high volume trade as fears of slowing growth in China pressured global markets.
“I think we probably rallied too fast. A lot of people that covered their shorts got their shorts covered,” said Peter Coleman, head trader at Convergex. He noted the Dow was still trading several hundred points off session lows and that a close better than 500 points lower would be a good sign.
“The market’s going to be focused on China tonight to see if they come on tonight with something that would be considered a viable (way) to stimulate growth in that economy,” said Quincy Krosby, market strategist at Prudential Financial.
The Dow Jones industrial average traded in wide range of between roughly 300 to 700 points lower in the minutes leading up to the close, ending down 588 points.
In the open, the index fell as much as 1,089 points, making Monday’s move its biggest intraday swing in history. In midday trade, the index pared losses to trade about 110 points lower.
During the first 90 minutes of trade, the index traveled more than 3,000 points in down and up moves.
The S&P 500 traded about 70 points lower as the tech sector failed to hold slight gains.
The index briefly lost 100 points in the open, initially joining the other major averages in correction territory before trading right on the edge.
“I’m hoping for some stability here but I think markets remain very, very vulnerable to bad news (out of) emerging markets,” said Dan Veru, chief investment officer at Palisade Capital Management.
He attributed some of the sharp opening losses to exchange-traded funds. “It’s so easy to move a bajillion dollars in a nanosecond.”
Trading in stocks and exchange-traded funds was paused more than 1,200 times on Monday, Dow Jones said, citing exchanges. Such pauses total single digits on a normal day, the report said. An increase or decline of five percent or more triggers a five-minute pause in trading, Dow Jones said.
The major averages came sharply off lows in midday trade, with the Nasdaq off as low as less than half a percent after earlier falling 8.8 percent. Apple traded more than 1.5 percent lower after reversing losses to briefly jump more than 2 percent.
“There was sort of a lack of follow-through after the morning’s crazy action in the overall market,” said Robert Pavlik, chief market strategist at Boston Private Wealth. “The selling really dissipated once we got to around 10 o’clock.”
He attributed some of the late morning gains to a short squeeze and bargain hunting.
Art Hogan, chief market strategist at Wunderlich Securities, noted that the sharp opening losses were due to great uncertainty among traders and the implementation of a rare market rule.
The New York Stock Exchange invoked Rule 48 for the Monday stock market open, Dow Jones reported.
The rule allows NYSE to open stocks without indications. “It was set up for situations like this,” Hogan said. The rule was last used in the financial crisis.
Stock index futures for several major indices fell several percentage points before the open to hit limit down levels.
Circuit breakers for the S&P 500 will halt trade when the index decreases from its previous close by the following three levels: 7 percent, 13 percent, and 20 percent.
“Fear has taken over. The market topped out last week,” said Adam Sarhan, CEO of Sarhan Capital. “We saw important technical levels break last week. Huge shift in investor psychology.”
“The market is not falling on actual facets of a sub-prime situation. It’s falling on fear of the unload of China. That’s really behind this move,” said Peter Cardillo, chief market economist at Rockwell Global Capital.
The CBOE Volatility Index (VIX), considered the best gauge of fear in the market, traded near 40. Earlier in the session the index leaped above 50 for the first time since February 2009.
“When the VIX is this high it means there’s some panic out there,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab.
However, he said with stocks more than halving losses he “wouldn’t be surprised if we closed positive.” “If you could move it that far you could move it another 350 points” on the Dow,” he said.
Overseas, European stocks plunged, with the STOXX Europe 600 down more than 5 percent, while the Shanghai Composite dropped 8.5 percent, its greatest one-day drop since 2007.
Treasury yields came off session lows, with the U.S. 10-year yield at 2.01 percent and the 2-year yield at 0.58 percent.
The U.S. dollar fell more than 1.5 percent against major world currencies, with the euro near $1.16 and the yen stronger at 119 yen versus the greenback.
A U.S. Treasury Department spokesperson said in a statement that “We do not comment on day-to-day market developments. As always, the Treasury Department is monitoring ongoing market developments and is in regular communication with its regulatory partners and market participants.”
The Dow Jones industrial average traded down 369 points, or 2.2 percent, at 16,092, with UnitedHealth leading nearly all blue chips lower and Intel the only advancer.
The S&P 500 traded down 50 points, or 2.5 percent, at 1,920, with energy leading all sectors lower.
The Nasdaq Composite traded 104 points, or 2.2 percent, at 4,602.
The Dow transports traded about 2.5 percent lower to approach bear market territory.
About 10 stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of 901 million and a composite volume of 4 billion as of 2:05 p.m.
Crude oil futures settled down $2.21, or 5.46 percent, at $38.24 a barrel, the lowest since February 2009. In intraday trade, crude oil futures for October delivery fell as much as $2.70 to $37.75 a barrel, a six-and-a-half-year low.
Gold futures settled down $6.10 at $1,153.60 an ounce.
No major economic data or earnings releases were due Monday.
Atlanta Fed President Dennis Lockhart said he expects a rate hike this year and did not repeat a September call.
It’s a bearish sign that so many advisers are declaring that we’re now in a “stock picker’s market.”
That’s because fewer and fewer stocks participate in a bull market as it approaches its top. Advisers therefore find it increasingly difficult to identify stocks that will keep up with the market, much less beat it.
By telling their clients this is a “stock picker’s market,” these advisers think they are distinguishing the investment environment from other periods in which the majority of stocks participate in the market’s major trend. Little do they appreciate that, in effect, they are also declaring the bull market to be getting extremely long in the tooth.
That’s because the degree to which stocks move together in unison is a function of the market cycle. In bear markets the vast majority of stocks do so, whereas in bull markets stocks tend to march to the beat of their own drummer. It’s at market tops, therefore, when stocks’ moves in step with the overall market tend to be at the lowest point.
Such as it is now. Last week, even as the broad market averages rose to within shouting distance of their all-time highs and some secondary averages actually did so, just 7.2% of stocks on the New York Stock Exchange hit new 52-week highs. A slightly greater percentage of stocks — 7.3% — hit new 52-week lows.
To illustrate the extent to which virtually all stocks suffer during market declines, in contrast, take October 2008. That was the single-worst month of the 2008-2009 bear market, when the Wilshire 5000 Index dropped 17.6%.
International stocks, which advisers often recommend as portfolio diversifiers, failed to provide any protection, with the MSCI EAFE Index tumbling 20.2%. Even traditional hedges such as gold failed to provide significant insurance: The London Gold Bullion price fell 17.4% in October 2008.
In contrast to the situation that prevailed in 2008, there’s been a significant divergence recently between the returns of these three asset classes.
In true contrarian fashion, the majority of advisers not only fail to appreciate this pattern, they get it precisely wrong. At the bottom of bear markets, after finally “discovering” that stock picking doesn’t provide much protection against a huge drop in the overall market, they declare that it’s a “stock market” rather than a “market of stocks.” Of course, that’s just when they should be redoubling their efforts at stock picking.
Just the reverse situation applies at market tops: After belatedly realizing that stocks are not necessarily moving up and down in lockstep with the overall market, they declare it to be a “market of stocks” rather than a “stock market.” That’s just when they should be focusing on the risks to all equity positions that a major bear market would represent.
Keep this in mind the next time your adviser announces that we’re now in a “market of stocks.” You may want to use this occasion to switch to a more contrarian-oriented adviser who can better protect you in a bear market.
U.S. stocks closed more than 1 percent higher in light volume trade Monday, following gains overseas on news of a bailout agreement between Greece and its creditors.
“I think it’s just a sigh of relief that it’s over, but let’s face it, they just kicked the can,” said Maris Ogg, president of Tower Bridge Advisors. “It seems like we kicked the can on a number of fronts. Earnings probably will be front and center int he next couple of weeks.”
About 11 stocks advanced for every 4 decliners on the New York Stock Exchange, with an exchange volume of 571 million and a composite volume of 2.8 billion as of 3:59 p.m. Average volume for the entire day is 3.4 billion.
“You’ve got a relief going on, short covering going on,” said Quincy Krosby, market strategist at Prudential Financial. “What you want for confidence buying is to see a market close with buying orders on the close.”
The Dow Jones industrial average traded about 220 points higher, with Microsoft and DuPont leading most blue chips higher. The index recovered recent losses to trade about 0.80 percent higher for the year.
The Nasdaq Composite jumped 1.5 percent as Apple and the iShares Nasdaq Biotechnology ETF (IBB) rose more than 1.5 percent.
The S&P 500 held near 2,100, led by a rise in information technology stocks and consumer discretionary’s 1.3 percent gain to an all-time high.
The Dow transports also briefly advanced more than 1 percent, with airlines leading gains.
“I think the market’s technically very oversold,” said Bruce Bittles, chief investment strategist at RW Baird. “The market’s poised to go up but to break this trading range (we’ve been in) since January you need to see volume pick up… number of stocks hitting 52-week highs expand.”
He said the S&P 500 breaking past 2,100 would be an encouraging sign.
European Council President Donald Tusk said early on Monday that euro zone leaders reached an unanimous agreement with Greece after all-night talks in Brussels to move forward with a bailout loan for the cash-strapped nation, provided Athens implement tough reforms.
“The jury’s still out on whether or not this is going to be accomplished,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
To receive this third bailout, Greece’s parliament must pass the new rules in areas such as privatization, labor laws and pension reforms by Wednesday. The 86 billion euro ($95.2 billion) in funds would come over three years.
In the meantime, euro zone finance ministers were expected to discuss Monday how to keep Greece financed before the bailout deal is reached. Athens faces a 7 billion euro repayment deadline on July 20 to the European Central Bank.
The ECB announced it maintains the emergency assistance cap for Greek banks, which will remain closed for at least two more days.
The Dow Jones industrial average futures were about 140 points higher before the open.
European stocks jumped on news of the conditional Greece deal, with the German DAX up about 1.5 percent and the STOXX Europe 600 up nearly 2 percent
In Asia, stocks surged with the Nikkei up 1.57 percent and the Shanghai Composite leaping 2.4 percent as it extended a recovery from a recent plunge.
Art Hogan, chief market strategist at Wunderlich Securities, said the domestic response will likely be less exuberant since the major averages ended last week little changed. Only the Dow eked out a gain, of a mere 0.17 percent.
Stocks rose slightly past their opening levels, while bond yields held steady. The U.S. 10-year note yield was 2.44percent and the 2-year held near 0.67 percent. The German 10-year bund yield fell to 0.85 percent.
The U.S. dollar extended gains with the euro dipping below $1.10.
Also in focus is the Iranian nuclear deal, which would allow more oil exports. Talks on a deal were extended past a June 30 deadline and are expected to reach a conclusion Monday.
Crude oil futures settled down 54 cents, or 1.02 percent, at $52.20 a barrel on the New York Mercantile Exchange. Gold futures fell $1.70 to $1,156.20 an ounce in afternoon trade.
No economic data or earnings of note were expected Monday.
Second-quarter earnings season gets underway with a slew of major reports on Tuesday that include JPMorgan Chase and Wells Fargo. On the economic front, retail sales are due Tuesday morning.
“Each data point in and of itself may not be important, but collectively they’re important, especially since there’s a premium on the data,” Krosby said.
Federal Reserve Chair Janet Yellen delivers her semi-annual testimony on the economy to Congress on Wednesday and Thursday.
“If she focuses on (international news and the dollar) that will give the market a huge boost because she’s more concerned about it than she suggested in her speech Friday,” Krosby said.
In other news, the United States posted a budget surplus of $51.8 billion in June, down 27 percent from the same period last year, the U.S. Treasury Department said on Monday.
The Dow Jones Industrial Average traded up 211, or 1.19 percent, at 17,972, with Microsoft and Caterpillar leading gains and Merck and UnitedHealth the only decliners.
The S&P 500 traded up 21 points, or 1.05 percent, at 2,098, with information technology leading nine sectors higher and utilities the only decliner.
The Nasdaq traded up 72 points, or 1.45 percent, at 5,070.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.
The first sign of trouble on the New York Stock Exchange was a color — a sickly yellow.
On the hand-held computers on the cavernous trading floor, that color meant one thing: the Big Board was down.
What began Wednesday morning with a seemingly workaday software glitch soon escalated into one of the most startling computer outages in Wall Street history — and, for the Big Board, a race against the clock.
At the 9:30 a.m. opening bell, traders’ orders for some stocks weren’t reaching the proper destinations for processing. Techies were frantic to fix the problem. At about 9:32 a.m., they succeeded.
Two hours later, boom.
One floor trader started shouting, “My handheld’s down! My handheld’s not working!” He and other traders hurried over to a ramp on the trading floor where NYSE executives usually meet with them to explain any problems. Not today. Three hours later, still nothing. Everyone was just standing around.
“The order flow wasn’t being entered into the display books on the trading floor,” said Pete Costa, president of Empire Executions Inc. who’s worked at the exchange in downtown Manhattan for 34 years. “As soon as that happened, the exchange shut down to understand what was going on.”
Every computer screen “went this pukey, canary yellow color,” Costa said. “That means the stock has stopped trading.”
Seven thousand orders were sent but never executed, he said. The system had to be rebooted. That took about 45 minutes.
The big concern was getting the exchange up and running as soon as possible. The 4 p.m. closing bell loomed. That’s when the NYSE sets stock prices that indexes and mutual funds use to calculate their values.
“My initial reaction was, ‘That’s OK, I hope they can reopen for the close,’” said Jamie Selway, head of the electronic brokerage at Investment Technology Group Inc. in New York. At the open and before the close, orders can be routed to other exchanges, he said. But at the close, the world needs the NYSE.
The traders at Cambridge Global Payments, a global foreign- exchange and payments provider in Toronto, “kind of paused” when the NYSE went down, said Karl Schamotta, the firm’s director of foreign-exchange research and strategy.
“The trading floor took a moment to collect its thoughts before we moved forward,” he said. Because of the meltdown in China’s stock markets and concern over a possible Greek exit from the euro zone, “we’re sitting in a situation where traders have their fingers on the trigger globally, so there’s certainly a fear complex.”
There was little time for exchange officials to pause. Art Cashin Jr., a managing director for UBS Financial Services Inc. and one of six executive floor governors at the NYSE, answered his phone a few minutes before 2 p.m. and said, breathlessly, “We’re dealing with the glitch. We’re rushing to try to get it open.” And hung up.
The exchange was back in business by 3:10 p.m.
In Greenwich, Connecticut, Marc Pfeffer had two worries about the shutdown.
The first was that it was due to hacking. That concern was laid to rest by a U.S. Department of Homeland Security official soon after the shutdown.
The other was the release of the minutes from the Federal Reserve’s June meeting at 2 p.m. The opinions of the central bankers drive sentiment for stock-pickers worldwide, and Pfeffer, a senior portfolio manager at CLS Investments, was anxious that a rush of orders might prove unwieldy with the largest U.S. exchange out of commission.
It turned out that he needn’t have worried.
“From where I sit, it doesn’t seem to have had any impact at all,” Pfeffer said. “And for our business, it’s been business as usual.”
That’s because the NYSE is one of 11 exchanges and more than 50 private venues where American stocks change hands. While today’s issue affected transactions on the company’s main market, investors could still buy and sell stock elsewhere.
“One of the benefits of a decentralized, competitive market is that it makes the markets more resilient to an outage in a single market,” said Adam Nunes of Hudson River Trading in New York. “ The market was less resilient to this kind of outage 10 years ago.”
Written by Sam Mamudi, Leslie Pocker, and Ryan Hoerger of Bloomberg
Trading on the New York Stock Exchange in late-morning trade on Wednesday with U.S. stocks extending their losses as continued concerns about Greece and the extended selloff in the Chinese market pressured investor sentiment.
“We’ve had some technical malfunctions. Some may be related to connectivity with other exchanges. I believe we’re going to have a temporary pause certainly in a variety of stocks perhaps floor wide,” Art Cashin, director of floor operations at the NYSE, told CNBC, adding that the halt will not cause a move in a particular direction.
Other exchanges, however, continued trading normally. The NYSE later said that all open orders amid the halt will be cancelled.
“What happens with these situations is often you get a sort of residual result. You’re all clear or you get caught up to date and there’s a little bit of a backlog that pops up somewhere, and it tends to jam things up. So I don’t think any of us has quite enough information yet,” Cashin added.
The Dow Jones industrial average traded about 175 points lower when trading was halted as the major averages declined, with the Nasdaq Composite briefly off more than 1 percent as biotechs and Apple (AAPL) plunged more than 1 percent. The iPhone maker was also the worst performing stock in the Dow.
The S&P 500 struggled to hold gains for the year. The index dipped into negative territory Tuesday but recovered in afternoon trade to hold slightly higher for 2015.
“I think we’re just realigning the U.S. market with the declines elsewhere,” said Peter Boockvar, chief market analyst at The Lindsey Group.
In China, the Shanghai Composite closed nearly 6 percent lower despite supportive government measures. The index has fallen more than 30 percent from its mid-June peak amid frequent bouts of extreme volatility. Analysts say the turbulence is starting to unnerve regional investors.
“There was no real trigger until Chinese stocks became too pricey,” said Nick Raich, CEO of The Earnings Scout. “The trigger that sent this all off has been the Greece debt crisis.”
European stocks traded higher on Thursday amid hopes of a Greece deal. However, the indices are more than 2 percent lower for the week so far.
The Greek government has until Friday morning to present detailed reform proposals to allow a bailout deal by a Sunday summit.
Greek Prime Minister Alexis Tsipras addressed the European Parliament on Wednesday, lambasting Europe’s advocacy of austerity and the efficacy of Greece’s bailout programs since 2010, but promised a detailed, “concrete” deal would be presented in the next two to three days.
“Unfortunately the U.S. will remain headline-driven until earnings season which (starts) with Alcoa tonight,” Boockvar said. “Today will clearly be bullied around by headlines out of Greece.”
The Federal Open Market Committee (FOMC) minutes at 2 p.m. ET will also be in focus, with traders scanning the Federal Reserve’s June meeting report for hints on interest rate rise timing.
“I think the Fed minutes are something to watch closely,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab. But “usually the market doesn’t do much around the minutes until they’re released.”
The Dow Jones Industrial Average (.DJI) traded down 194 points, or 0.99 percent, at 17,583, with Intel leading decliners and Microsoft (MSFT) the only advancer.
The S&P 500 (.SPX) traded down 23 points, or 1.14 percent, at 2,057, with telecommunications leading all 10 sectors lower.
The Nasdaq (.IXIC) traded down 64 points, or 1.31 percent, at 4,931.
The CBOE Volatility Index (VIX) (.VIX), widely considered the best gauge of fear in the market, traded near 18.
About five stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of 194 million and a composite volume of 1.22 billion as of 11:30 a.m.
Crude oil futures for August delivery lost 81 cents to $51.52 a barrel on the New York Mercantile Exchange. Gold futures rose $7.50 to $1,160.20 an ounce in morning trade.
Bond yields held lower, with the 10-year yield at 2.23 percent and the 2-year at 0.57 percent. The Treasury auctions $21 billion in 10-year notes this afternoon.
The U.S. dollar fell about half a percent against major world currencies as the euro gained to above $1.10.
Earnings season unofficially begins with aluminium producer Alcoa (AA) reporting after the market close.