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Why The US Market Fall Is Just Noise

Markets can be irrational.

One minute, things are chugging along as normal. Next minute, panic is ensuing and the market starts sliding.

On Friday last week, both the Dow Jones and S&P 500 fell 2.5% and 2.1% respectively.

According to Mike Baele, managing director at US Bank Private Client Reserve, the US market was a little spooked by all the positive data floating around, saying:

The key for the market today is rising interest rates. The old adage is: “Bull markets don’t die of old age, they are killed by higher interest rates.” That looms large.’

The numbers coming out are suggesting that the US economy is looking good. That’s telling the Federal Reserve that the economy doesn’t need low interest rates anymore to prop it up.

At least, that may be the case on paper…

I’m always sceptical of official data. The Shadow Stats Alternate Unemployment Rate in the US for January sits at 21.8%. That’s almost four times higher than the official figure of 4.1%.

The problem is that the Fed tracks official government data to guide its policy-making. And official statistics are painting a rosier picture than reality might suggest.

Why, then, does the market forecast a March rate rise instead of a February one?

Since the financial crisis, the Fed has developed a habit of raising rates when they are followed by a press conference. This enables it to ‘explain’ the reasons to the press.

Even though the Fed meets eight times a year, it only holds a press conference in March, June, September and December.

Granted, pre-financial crisis, the Fed would change rates without a press conference. However, this was at a time when markets weren’t so fragile to change.

Nowadays, global markets need plenty of time to prepare for a rate change.

A big correction?

There wasn’t an obvious reason for why the S&P/ASX 200 dropped 1.56% (95 points) to close at 6,026 points yesterday.

No data or news drove the market down. However, the selling is likely to continue today.

Overnight, the US market threw a tantrum.

Both the Dow Jones and the S&P 500 did the unthinkable, falling 4.6% and 4.1% respectively.

This is important to note. But there’s no need to overreact to this. 

Last night’s price action was wild. Neither US index has fallen more than 3% since February 2016.

That’s a two-year record in which the US market has had an unbreakable rally. There’s been no pullback. And no sign of a market correction.

However, both indices did fall below their 50-day moving average.

S&P 500 daily/yearly chart

S&P 500 daily/yearly chart 06-02-2018

Source: Yahoo Finance
[Click to enlarge]

Dow Jones daily/yearly chart

Dow Jones daily/yearly chart 06-02-2018

Source: Yahoo Finance
[Click to enlarge]

Is it time to panic?

While the Aussie market may head down in the interim, I don’t believe there’s much cause for alarm.

Falling below the 50-day moving average is more of a psychological point. As you can see in both charts, the indices have been well above the 50-day moving average (purple line) for six months.

They touched the purple line in August; however, a couple of months later, they were rallying again.

Most people have been waiting for the US market to fall on something…any news to bring the US market back down to Earth. What we may see from here is the US market trading along the purple line for a month or so.

I wouldn’t take these last few days of market action as a sign a big correction has arrived. It’s important to watch the US market without allowing yourself to get caught up in the noise.

Often, daily price swings merely distract you from long-term wealth building.

Chances are the Aussie market won’t fall as much as the US markets have this week. After all, our market hasn’t reached the same crazy highs as seen in the US. We simply don’t have that far to fall.

Instead, watch and learn what’s driving US market movements. Try not to get caught up in the hype and risk making knee-jerk decisions.

Come next week, it could be business as usual.

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