Gregory A. Clay's Investor Report: Market At Inflection Point

Market Summary

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U.S. stocks crashed hard Friday, but The Dow Jones Industrial Average took the biggest hit. The Dow suffered its second-worst Friday drop in 2015 on a point and percentage basis, according to Dow Jones data. Blue chips tumbled 289 points, or 1.7%, registering the worst close since Aug. 21, when the Dow plunged by 530 points, or 3.1%, fueled by worries about China’s sagging economy. This time around the stock-market rout was inspired by the Federal Reserve’s decision to leave rates unchanged due to concerns about emerging-market economies like China. The other main indexes didn’t do much better. The S&P 500 lost 32.12 points, or 1.6%, while the Nasdaq Composite Index gave up 66.72 points, or 1.4%. Friday's selloff wiped out the stock market's gains for the week. As seen in the graph below, the Dow is now down 8% on the year, while the S&P 500 is off 5%. Strong performances by technology and biotech stocks have kept the Nasdaq afloat, up 2% this year. For the week, the Dow shed 0.3%, the S&P fell 0.1% and the Nasdaq rose 0.1%.

The turmoil comes one day after the U.S. Fed announced that it was leaving its benchmark interest rate near 0%. Fed chief Janet Yellen said in explanation: "The outlook abroad appears to have become more uncertain." She was referring to the economic slowdown in China and its impact on the rest of the world, including the United States. However, the Fed's comments about market turmoil made investors even more nervous. Major stock markets in Europe, like Germany and France, fell over 2.5%. "What the Federal Reserve has done is increase uncertainty," said David Kelly, chief global strategist at JPMorgan Funds. "The stock market always hates uncertainty." Friday's volatility was also likely exacerbated by Quadruple-Witching when options on stocks and indexes, and futures on indexes and single-stocks all expire, prompting investors to buy or sell shares to cover expiring contracts.

Investment Analysis

Fears over slowing global growth hammered stocks in the U.S. and Europe on Friday and lifted prices of government bonds and other assets seen as safe-havens. The selling pushed down major stock indexes in Germany, France and Britain before spreading to the U.S. The S&P 500 slumped to its biggest loss in more than two weeks as all 10 industry sectors of the broad market gauge fell. Energy companies dropped the most as oil plunged. The stock sell-off came a day after the Fed announcement about holding interest rates near zero. This means borrowing costs will remain low for a while yet, a prospect that has in the past typically boosted stocks. But some investors, expecting the Fed would be confident enough to nudge rates up by at least a quarter of a point, interpreted the stance as a sign that the global economy is dangerously weak. "If growth in the strongest economy isn't strong enough to raise rates even a quarter of a point, what does that say about the prospects for global growth?" said Bill Strazzullo, chief strategist at market research firm Bell Curve Trading. The Fed has kept its benchmark rate close to zero for almost seven years. In that time, U.S. stocks have nearly tripled from their financial crisis low. In the graph below you can see Treasuries are the only asset class with a quarterly gain as investors dump equities and park the funds in bonds.

High-frequency trading accounted for 49% of this month's trading volume of about 6.9 billion shares, according to TABB Group. During the peak levels of high-frequency trading in 2009, about 61 percent of 9.8 billion of average daily shares traded were executed by high-frequency traders. Interest rate-sensitive sectors such as Utilities and Real Estate spiked at week’s end, following the Fed announcement that benchmark interest rates would remain unchanged for now. And according to some traders, the initial market reaction is a clear buy signal for some of these beaten down categories. "It is definitely a green light to start to incrementally add yield-sensitive instruments back into your portfolio for the short term," Neil Azous, of Rareview Macro, said Thursday on CNBC's "Trading Nation." Larry McDonald of Societe Generale recommended watching gold miner stocks and commodities in addition. He said commodities would benefit from a weaker U.S. dollar. McDonald also said these sectors have a tendency to rally each time the Fed pushes back a rate hike.