Stocks finally broke their five-week winning streak as the Dow Jones Industrial Average lost 87 points, or 0.5%, on the week to close at 17,515.73. The S&P 500 dropped 14 points, or 0.7%, to 2,035.94, while the Nasdaq Composite Index fell 0.5% to 4,773.50.
All in all, it was a quiet holiday-shortened week in which investors ignored a major terrorist attack in Brussels and comments from several U.S. Federal Reserve governors that they are itching to raise interest rates.
Apparently both terrorists and Fed governors are losing their ability to frighten investors.
Here's why that's not a good thing.
No One Should Believe These Talking Heads Anymore
Economists should have lost their credibility a long time ago.
The Atlanta GDPNow model was lowered to a real annual rate of 1.4% for the first quarter last week, roughly half the estimate of early February and strangely even with revised fourth-quarter GDP. The Commerce Department reported Thursday that durable goods orders fell in February by 2.8% from January.
There is no economic boom on the horizon, but the Fed continues to cling to outmoded inflation and employment numbers that ignore what is happening in the real world.
For instance, Janet Yellen & Co. ignore the 96 million people who exited the jobs market and falsely declare that the unemployment rate is under 5% while claiming that inflation is under 2% while the price of everything except energy (especially healthcare) rises inexorably in the faces of consumers and businesses. Then it uses these phony numbers to justify its incessant policy errors.
And the market just swallows this nonsense like swill.
On the Other Hand, This Is a Credible Threat
Terrorists, however, should be believed.
They do exactly what they say they are going to do - kill innocent people. That is what cowards do.
The Belgian authorities were too feckless and incompetent to stop them, while allowing a radical Islamic zoo to breed right under its nose in the Molenbeek neighborhood, and now they have blood on their hands.
The proper response is to cordon off this neighborhood with police and military forces and to search anybody entering and exiting until all of the terrorists are caught or killed. If the Belgians do not have the resources to do that, I am sure that the French and other NATO allies will be happy to lend them a hand.
In the meantime, investors should pull their heads out of their you-know-whats before it is too late, because the next target isn't going to be an airport check-in or a subway but a nuclear power plant, and the next weapon isn't going to be a homemade explosive but a weapon of mass destruction - I guarantee it.
Central bankers and economists may be shooting blanks, which poses its own threat to Western civilization, but radical Islamic terrorism is not shooting blanks, and that poses a clear and present danger to our way of life and to markets.
Until last week, Westerners were largely spared in 2016, but people living in Turkey, the Middle East, and Africa are subject to attacks literally every week.
This Could Be a Lot Worse Than Any Market Crash
It is the height of narcissism to believe that this threat isn't going to spread. It was only a matter of time before blood ran in the streets of Europe again, and it is only a matter of time before it runs in the streets of America.
ISIS is reported to have sent 400 fighters to Europe to mount the next attack. Who knows how many sleeper cells are lurking in the United States, though we know there are active FBI investigations in all 50 states.
Investors who blithely focus on corporate earnings or other purely domestic concerns are missing the big picture and are going to get slammed.
Rising Dollar, Sinking Markets
One reason the markets stopped rising this week is that the U.S. dollar stopped dropping. The U.S. Dollar Index (DXY) rose from just over 95 to 96.13 on the week, ending a recent downdraft.
Oil also ended its recent rally, with West Texas Intermediate dropping from $40.76 to $39.79 on the week.
It is very difficult for oil prices to rise or, for that matter, stock prices to rise if the dollar is rallying. With the Fed making noises (believable or not) that it may hike rates sooner rather than later and other central banks continuing down the path of lowering rates into negative territory and destroying the value of their currencies, the likely path of the dollar remains upward, placing pressure on stock prices and oil prices.
This is going to make it very difficult for the recent rally to continue.
Stocks are expensive, as are junk bonds, which are starting to see a significant increase in defaults. Market conditions are unlikely to improve from here.
And then there are those terrorists...
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About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.