Get ready for some crazy price trends in the US markets as investors react to earnings, housing data and overall re-evaluations of future objectives. As we warned on September 17 with this post and on October 1 with this post, we believed the future Q3 earnings weeks and the 2~4 weeks leading into the US Mid-term elections could be very volatile. We even suggested a 5~8% price correction was expected to start after September 21~24.
What we did not expect is the Federal Reserve to raise rates, again, on September 26 – just days before the Q3 Earnings season actually started. Our price models for the Fed Funds Rates have suggested that any move above 2% FFR would put pricing pressures on homes and other assets. This research we completed was first published in 2015 here. This was the first time we illustrated our Fed Funds Rate Adaptive Learning modeling systems results. The chart within this article that shows that our model expected the US Fed to begin increasing interest rates in 2014~2015 to levels near 0.75~1.25. From that point, a gradual increase towards 2.0 was expected prior to 2018~19. Our price modeling system then expected a decrease in the FFR from 2.0% to between 1.5~1.75%.
The reason our model expected this decrease in the FFR near current time is because the balance between growth of asset values, credit expansion and consumer’s ability to navigate efficiently within these constructs becomes very constrained above 2%. In other words, as soon as the US Fed raising rates above 2%, they risk blowing holes in the economic recovery simply because it will outpace consumers ability to borrow and repay in an efficient manner.
We continue to believe this is the root of what is transpiring in the US Equity markets currently as a crush or reality has hit traders and investors as the housing, trade, Fed and other data is hitting the news wires. So far, the earnings release have not been anything but a success when you look at the real data. Nearly 75%+ of the total earnings announced as I write this post have been positive. Yet, the markets collapsed on news related data and home sales data. With more of this data streamed into the news cycle, we can only expect one thing to happen – a continued washout or price near recent lows or slightly lower as investors continue to digest this data and react to perceived weakness.
