Is the bull market over, or is this a short-term pullback?

It was all going so swimmingly well. The money printer was going brrrr and stock markets were going whoosh. Simples.

Then last week came along and suddenly things are looking decidedly dicy.

Let’s review.

Markets don’t know if they’re coming or going 

The bulls had control of the tape. The September swoon was forgotten. New highs were an almost daily occurrence. Markets looked well placed for the Santa rally and the Christmas bonus.

Heck, the S&P 500 at 5,000 by early next year looked on the cards.

Then along came the latest variant of the virus, the one they should have called Xi, but for reasons of health and safety – well tact – called Omicron instead, and the bulls were caught with their trousers down. 

Last Friday markets suddenly went “risk-off”. Everything sold off – and hard. Excessively so, it seemed. This wasn’t March 2020 all over again. Over the weekend, participants gathered their thoughts – consensus was that the sell off was overdone and on Monday we got a whopper of a relief rally. Normal business was resumed.

It seems there was an excess of complacency, however. Markets got walloped again on Tuesday – “Actually, do you know what, we are not sure how effective vaccines are against this new variant?”  – that was one problem.

The other was a surprisingly hawkish turn from the money-printer-in-chief, Jerome Powell, 16th chair of the Federal Reserve Bank. 

All this inflation we’ve been seeing is “transitory,” the money-printers have been saying. Then suddenly Powell declared that it isn’t: “It’s probably a good time to retire that word,” he said. What? Sell!

His next line got the Fed-speak interpreters smirking: it’s also probably a good time, he said, to “explain more clearly what we mean.” Expect obfuscation – and lots of it.

Here’s what really got the jitters going though. It’s time, Powell said, for the Federal Open Market Committee (FOMC) to consider accelerating the pace of the quantitative easing (QE) taper at its December meeting. 

That doesn’t mean they are going to stop the money printers. It doesn’t even mean they are going to accelerate the pace at which they slow them down. It just means the time has come to consider deceleration.

How about that for bureaucrat-speak? “The time has come to consider”.

One hopes they would have been considering this for some time previously (which they will have been, of course) but when a central banker says the time has come to consider, markets – which are more addicted to stimulus than I am to Twitter – panic.

The S&P 500 tanked. The Dow tanked. The Nasdaq tanked. Wednesday saw a relief rally, but then it emerged that the Omicron variant has reached California, and so markets tanked again. 

My hunch is that it’ll all be OK

As always, it’s easy to make the bear case and it’s easy to make the bull case. But I am going to take the line that this is a tantrum, not the beginning of a crash.

In the short term we are extremely oversold – the type of oversold that marks short-term bottoms. We have pulled back to roughly the 21-week moving average (looking at a weekly chart) and said moving average, give or take a few points, tends to market the level where tantrums end. 

I’m suggesting that this correction is more of the “pullback in an ongoing bull market” variety, rather than the onset of the end of the world. If the world really does start to end, I console myself with the thought that they will just print more money and stop all this chat about considering accelerating the pace at which they taper. Their hands are tied: markets are addicted to stimulus.

We seem to get these tantrums – or pullbacks to the 21-week moving average – about once a month. We got one in May, in June, in July, in August. We got a pretty big one in September. And we are getting another one now. 

In the short term – like the next day or two – we probably rally perhaps to around 4,650. Then we correct a bit more, retest the lows, maybe even go a bit lower. That would be typical market action. Flush out a bit of the excess.

But I don’t think this is the end of days. Far wiser heads than mine say it is. I reserve the right to be wrong. I always do. 

There’s a definite sense of the jitters about, and this urge to lockdown again is apparent. But it seems this latest bout of the virus, while more contagious, is less lethal. And threats to stop printing money are similarly more about hype than reality. 

Those are the two “causes” of the latest pullback and both, from the vantage point of this desk, look overblown.

In short, everything’s going to be ok. 

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookshops, with the audiobook, read by Dominic, on Audible and elsewhere.