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Last week, it looked like the raging bull market in equities came to a screeching halt.
Don't believe it. The equity bull market only hit the brakes because it drove full speed into a real wreck: the bond market.
There's no mystery to it.
It's not time to worry and definitely don't panic; there are two sides to this story.
There's some good news and there's some bad news. I'll give you the heavy stuff first.
The bad news is that there's more to come; markets aren't done falling.
But the good news is that stocks will self-correct, and there's lots of money to be made as markets adjust.
Here's what happened, what's next, and how to play this opportunity for profit…
The Bond Market Just Ran into a Wall
It's pretty obvious how we got here.
Since 2008, central banks have flooded global financial systems with more than $14 trillion of funny money. All that money went to bail out insolvent banks, stabilize them, and eventually flush them up with profits so core elements of the financial system could support economic growth.
It worked! In the process, besides the trickle-down growth that economies would eventually enjoy, the majority of central bank liquidity would far and away be parked in bond markets and equity markets.
First, money went into bonds because interest rates were going to be driven lower and lower (even into negative territory). Driving interest rates lower and lower caused bond prices to keep rising higher and higher, which is the only reason investors would buy negative-yielding government bonds. As central banks drove rates further into negative territory, those ugly bonds rose in price.
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Then, starting quickly in 2009, money went into stocks. Interest rates were low, so the yield on fixed-income investments was unrewarding. Equities, starting with dividend yields on stocks, were more attractive, and recovering economies would benefit corporate earnings and stock prices.
It all worked. Bond prices rose handsomely and equity markets soared.
But as the legend goes, Icarus flew too close to the sun.
As if no one was watching the effect that was clearly visible, the economic growth (which drove unemployment down relentlessly and, as of Friday, showed some decent wage growth) suddenly ignited some inflation.
We haven't suddenly turned some corner and are now facing stagflation; what's happening is healthy.
Wage growth notched 2.9% growth in January compared to a year ago. That's not surprising in the least. Job growth has been increasing for 88 consecutive months, and investors are surprised by some healthy wage growth all of a sudden? It's crazy.
It's good for the economy that people are working, and good for consumption, production, and profits that wage growth puts more money in the hands of working Americans.
There's no crazy inflation, no stagflation, no glaring red lights pointing to trouble ahead. There's just healthy growth.
The Fed's been trying to get inflation to 2%; they may be on the verge of finally getting close, maybe. The CPI growth rate in December was 0.1%. For all of 2017 it was 2.1%, and that's with energy jumping higher in the latter half of the year.
That's what the Fed wants.
But there's no reason to panic over inflation pressure because those are the "all items" CPI numbers.
However, just because there's no reason to panic doesn't mean that people won't.
What Happens Next?
About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.