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Wall Street may be calming down after its month long rally

Infinox Contributor
Fed Meets As Speculation Builds On Possible Rate Cut
Wall Street may be calming down after its month long rally (Source: Getty)

Wall Street’s bull run had been due a reality check for weeks. Yet when it eventually came, the only surprise was its speed and scale.

The trigger was that time-honoured red flag - an analyst note which prompted US traders to question their recent run of frothy exuberance.

On Monday morning, Goldman Sachs warned that Wall Street was due a major correction. By the end of Tuesday, US stocks had experienced what might be described as a mini one at the very least.

Monday had started positively enough. There was a reasonable expectation the Dow Jones could pop 27,000, particularly given the number of US corporate giants reporting what were expected to be strong quarterly earnings.

Instead, the Dow Jones dropped 177 points on Monday and then 362 points on Tuesday.

Increased volatility

If proof were needed that trying to call the market is a delicate business, this was it.

In his note on Monday Goldman Sachs’ chief global equity strategist Peter Oppenheimer said: "The increase in volatility amid a market rally may, in part, reflect increasing risks, and may also reflect a bullish willingness to spend premium to add to upside exposure.

"Investors should be vigilant to periods when optimism has overpriced assets, leaving them vulnerable to small 'disappointments.'

“A good sign of this is when 'all news is good news': for example, the market goes up with rising interest rate expectations because this is seen as confirmation of strong growth."

Translated this means market volatility is on the up, which could lead to big swings and markets themselves may have recently been ignoring fundamentals and getting a little over-excited at the prospect of a US economic boom.

Markets responded to Mr Oppenheimer’s warning almost immediately. It was as if they were just waiting for someone to say things were overheating.

Fed rate meeting

At the same time let’s not forget that Wall Street can also get jumpy ahead of a possible interest rate rise. Although the chances of Janet Yellen making a valedictory hike as she bows out as chair of the US Federal Reserve seems remote in the current climate.

Should we worry that stocks are overpriced? Maybe, but at the same time there’s no need for panic. In all likelihood the markets, reassured that interest rates aren’t likely to rise before March - and by strong earnings from Amazon, Apple and Alphabet among others later this week - will probably recover to roughly where they started the week.

But the impact of the Goldman note shows there are more than a few traders out there who are fairly cautious about how long the current bull run can last, and a little bit of caution in the weeks and months ahead, may not be a bad thing.

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