Unlikely events unfolded on a Tuesday in June when it rained in Los Angeles. While the precipitation was minimal—less than a tenth of an inch—it was enough to reveal a hole in the sole of my shoe as I walked through John Fante Square.
But this was not the only surprising occurrence that day. The bond and gold markets sent mixed signals, indicating both inflation and deflation. Yields on the 10-year Treasury note surged to 2.41 percent, hinting at inflation, while gold prices dipped 0.19 percent to $1,175 an ounce, suggesting deflationary expectations.
The following day, the market remained unsettled. Ten-year Treasury yields surpassed 2.47 percent, while gold prices remained steady. By the day after, yields fell back to 2.38 percent, with gold maintaining around $1,182 per ounce and crude oil fluctuating near $60 a barrel.
The stock market exhibited notable volatility, with the DOW enduring a rollercoaster ride of ups and downs. Despite this turbulent year, it currently holds about the same value it did at the start.
Ominous Parallels
Mark Cook from MarketWatch identifies alarming similarities between today’s market and that of 1987.
“That summer began with a cautious increase in actual rates, yet the Fed held off on raising the discount rate, despite rising indications. By the fall of 1987, the stock market had reached an all-time high in late August, overlooking a troubling climate,” Cook notes.
“As events unfolded, the Federal Reserve found itself compelled to increase interest rates, having fallen behind the curve, much like today. The rising rates led to a shocking downturn, with stocks plummeting over 30 percent in just two months, culminating in an infamous 20 percent drop in October—one of the worst single-day declines in the history of the Dow Jones Industrial Average.”
“We’re witnessing similar warning signs now. The first week of June saw the highest interest rates since December, with bond prices down around 12 percent since January’s end.”
“The stock market typically follows the trend of the bond market, but this impact is often magnified. With a conservative multiplier estimate of 2.0 against the 12 percent decline in bond prices, we could see a significant 24 percent drop in stock prices, which would mean a loss of approximately 500 points on the S&P 500 and close to 4,300 points for the DOW.”
Riding the Waves
Meanwhile, there’s a growing sentiment among analysts that a significant selloff may be imminent. Robert Prechter of Elliott Wave International, who has monitored market wave patterns for over 35 years, believes markets typically rise in five waves and retrace in three.
Despite attempts to decipher predictable wave patterns from stock charts, many find it challenging. Prechter, however, has successfully navigated these market fluctuations and currently perceives foreboding wave patterns indicating a possible stock market collapse.
“If the cycle remains intact,” states Prechter, “the stock market is at a heightened risk of a steep decline. While we might see the DOW achieve one more peak in the near term, it is not guaranteed.”
“Currently, we are experiencing the third market mania in 15 years. The extreme overvaluation seen in 2000 has yet to be adequately addressed, but it will be,” he warns.
Regardless of one’s stance on Elliott Wave principles, it seems prudent to consider reallocating some investments from the stock market at this juncture. A substantial market correction could be on the horizon before the year’s conclusion.
Sincerely,
MN Gordon
for Economic Prism
