Many have used the above title to explain nearly
everything, and cite examples. However I’ve found that more often than not the
positions that people need to rationalize for comfort often come at the expense
of the facts. The facts I’m talking about are simple ones, such as what goes up
must come down. But as the market responded today to massive disruptive actions
by Amazon, JP Morgan and Berkshire Hathaway announcing they were entering the
healthcare industry some outlets are suggesting that’s why the market went down
today. You can probably already guess, I don’t agree, here’s why.
Interest Rates
Recent move in interest rates have seen a rise in the
yield of 10 year Treasury Notes to over 2.7%. This is not a level seen since
2014 and can be directly attributed to both the recent action of the Federal
Reserve Board and the growing concern of inflation. Needless to say the stock
markets can withstand changes in interest rates as long as they don’t happen
too quickly. And while there is also over $200 billion dollars in Treasury Debt
to be auctioned in the next thirty days that too could be have an effect on
current interest rates. In all there is economically much to look at and it’s
up to the Fed to make a decision on further rate hikes. That distracts the
markets attention, and that can feed a correction.
The Dollar
Recent concerns that the dollar is sinking are often
discussed as a negative, and I don’t know why. A lower dollar is inflationary
and having studied the behavior of the dollar’s correlation to the domestic
trade balance, the impact to the economy is negligible at best. As a service
industry the US doesn’t need a weak dollar to grow, even with the current
interest in manufacturing. Our economy is based on consumption, not trade, and
that isn’t going to change soon (if at all). Likewise as long as the Fed is
poised to raise interest rates, that has the effect of pushing the dollar up,
which is naturally disinflationary. But right now the currency is feeding
inflation fears here, and even abroad, and that can feed a correction.
The Market
As you know investment value can come in two packages,
those representing the fundamental value of a company and those the technical
value of a stock. The former is an elusive valuation and the latter occurs when
the broad markets decline as they’ve done this week. Coming out of strong
year the broad markets found their way higher as earnings results and creeping
acceptance of the benefits of the recent tax plan (for companies at least). But
since the beginning of last year the recent charge amounting to an aggregate
increase of over 30% rendered the expectations of any corrections either
too ambitious or too complacent, but not impossible. And best, not necessarily
a bad thing either.
Corrections
What occurred following the announcement of the mega
merger designed to defy the existing rule of the health care industry is, in my
opinion, welcome news, but hardly original news. As recently as last year when
CVS Pharmacy (CVS) bought Health insurer Aetna (AET) the game was on. The shift
of medical consumers toward urgent care centers and other resources for flu
shots and prescriptions has sent a clear message to the medical industry that
price does matter. Couple that with today’s release of consumer sentiment data
that was the highest since before the financial crisis and I’m not just
being optimistic, I see value in the market after today’s decline and the
newest disruption that has arrived to deliver it.