Known Unknowns (and Other Theories) Explain the Plunging Market

[NOTE: The following does NOT constitute investment advice of any kind. It is for education or entertainment only]

 ‘There are known knowns. There are things we know that we know. There are known unknowns. That is to say, there are things that we now know we don’t know.” Donald Rumsfeld 2002

                 That the stock market fell does not surprise me: I have wondered how the rally could continue before the long list of threats to the global economy would reduce share prices. But I was surprised that it happened so abruptly.  I should not be surprised at that, however, because markets generally fall much faster than they rise: investors often “get in” in increments and “get out” in a cataclysm.  And while stocks only fall for two general reasons (see my post ), I am tempted to suggest a more specific explanation (or a set of them) for the dramatic plunge in prices since the beginning of October. As I consider the possible causes, I realize the folly of trying to identify the precise cause of the sudden drop and choose rather to point out how many forces act upon stock prices at any given time. Here’s sample list of possible contributing forces:

  • One or more large sovereign funds (large, foreign-country investment funds) is/are selling their equity holdings to raise needed capital or dollars or to strike back at the US for political reasons
  • Highly leveraged hedge funds got caught in the downdraft and had to liquidate before year-end in order to keep some of their profit bonus
  • Quantitative Fund managers (Quants) are triggering sell orders based on a series of cascading technical (chart) signals, i.e. as old support levels are broken, those sell signals cause new support levels to be broken. It’s like a domino effect, but computer models are dictating the selling
  • Some new risk has been identified among the largest global money managers, and we know we don’t know the magnitude or impact of it. This could be, perhaps, something like China’s financial system imploding, or a more precise evaluation of the costs of global warming, or as Rumsfeld put it, “a known unknown”
  • There have been leaks of the true (very damaging) content of the Mueller investigation to an elite group of insiders and the implications are economic as well as political
  • The crash in oil prices is part of a larger war against the “axis of evil” like Iran, Russia, and now the Saudis and this destruction of wealth (and collateral) will cause energy-sector bond defaults–which could weaken the already leveraged global financial system through contagion
  • The spectre of de-globalization is threatening stability on all fronts, and the probability of increased regional or global conflict (maybe war) and protectionism are considered meaningfully higher
  • The reduction in Quantitative Easing (QE had effectively put money into the financial system. It’s called “QT” or “Quantitative Tightening” now because they are slowly unwinding the trillions of stimulus i.e. taking money out of the system) and rising interest rates have caused a sudden liquidity crunch that reduces aggregate share buybacks and excess bank reserves.

And lastly, because sometimes it’s the only reason stock prices fall:

  • There are more sellers than buyers

Whatever the cause, the market appears to be under serious liquidation. On the chart it looks like a falling piano. But that’s how bottoms usually begin–with a crescendo event.  It looks (to me) from a purely technical perspective that it should find some (temporary?) support just under 2300 for the S&P500.  [Chart from]

The last two major selloffs–which began about 9 and 18 years ago–were not done until they had fallen 50%.  Anyone who gets in the way of this market has to be prepared to endure more pain if they commit too soon. It’s better to have a plan before the market does the unthinkable, but most people just figure they are “in it for the long term.”  If you’re my age, the long term might not be long enough.



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