Yesterday, the Dow Jones Industrial Average fell 317 points, while the NASDAQ Composite Index fell 93 points—respective losses of about two percent per index. This morning, stock market futures are down again.
As a reader of Profit Confidential, this “rout” we are now in should come as no surprise. I have been writing for months how overpriced the stock market has become, how the stock market has become one big bubble thanks to the easy money policies of the Federal Reserve, and how the bubble would burst.
Yesterday, those who have been riding the stock market’s coattails higher and higher got the first taste of what is being called a “correction” by the mainstream media. But like I just said, to me, this is a stock market bubble that is bursting—very different than a correction. For months, historically proven stock market indicators (many of which I have written about in these pages) have been flashing red…but very few investors paid any attention to them.
The Dow Jones is now down for 2014. Yes, seven months into the year and big-cap stocks have gone nowhere. So far in 2014, investors would have done better owning gold and silver or U.S. Treasuries.
I have been predicting this will be a down year for the stock market and I’m keeping with that forecast. After five consecutive positive years for the stock market, the bounce from the 2008 market low of 6,440 on the Dow Jones could finally be over.
Dear reader, as elementary as it sounds, interest rates are the catalyst for all this.
After falling for 30 years, a time in which the stock market did very well, interest rates bottomed out in July of 2012 and started moving upward. The 10-year U.S. Treasury yielded 1.46% on July 16, 2014. Today, that Treasury yields 2.56%, up 75% in two years.
The Federal Reserve itself couldn’t be any clearer; it is predicting the federal funds rate will rise from about zero today to 1.2% by the end of 2015 and on to 2.5% by the end of 2016. The Fed has no choice. Inflation is getting out of control in various pockets, the jobs market has improved substantially, and slack in the economy has been absorbed.
Higher interest rates will cost public companies billions of dollars in extra expenses. Those companies will think twice about borrowing money to fund their stock buyback programs. And consumer demand for goods and services will eventually soften as interest rates rise.
But back to the question everyone is asking this morning. That question shouldn’t be “How long will this stock market correction last?” The question should be “How low will the stock market go and how long will it take to get there?”