What's pushing stocks lower? Nearly everything
After a brief reprieve on Monday, stocks declined sharply again on Tuesday, with the Dow Jones Industrial average moving to within 30 points of its 200-day moving average at one point. It hasn't broken below that level since February.
After the relative calm and quiet of the last few months, the newfound market volatility is causing many investors to wonder what's driving the selling and how much longer it will continue. At its core, the problem is that the "Goldilocks" condition that has prevailed and supported share prices is beginning to end.
You can see this in the way the geopolitical situation in Iraq and on the Russian-Ukrainian border is heating up again. ISIS forces have reportedly taken control of one of Iraq's largest dams, threatening Baghdad's water supply. The conflict has brought in Iranian forces allied with the Shias in control of the capital, increasing the risk that Iran will gain influence in one of the world's major oil-producing countries.
In Russia, Moscow is responding to new economic sanctions from the West and Ukraine's military gains against pro-Russian separatists in the east with another buildup of military assets, including infantry, anti-aircraft systems, heavy armor and artillery. There are reports that much of the hardware is painted with the Russian logo for peacekeeping missions, raising concerns that Russia will use this as a pretext to invade.
Western officials are saying Russia has increased its forces on the border to upwards of 21,000 troops, a doubling of recent levels.
Also weakening stocks is the appearance of better-than-expected economic data. The latest example is the ISM services sector activity report jumping to its best level since August 2005. This, combined with the best run of job creation since the 1990s, is putting pressure on the Federal Reserve to bring forward the timing of its first interest rate hike.
Last week, the more hawkish members of the Fed made their feelings known that keep interest rates too low for too long in this environment is dangerous. That was the initial catalyst for the current market pullback since it threatens the flow of cheap money stimulus that's been so central to the market's relatively smooth and consistent rise over the last two years.
More status-quo-shaking events are approaching. If the trend in the economic data continues to strengthen and pushes up inflation measures (consumer price inflation will be updated on Aug. 19), the Fed-fueled fears will grow. The Ebola outbreak is showing little signs of slowing. And of course, the political status quo in Washington is set to end in just three months as the midterm elections approach.
Given the evidence that investors were overly confident and complacent heading into the current bout of volatility, the pullback will ultimately be a good thing if it washes away the excess greed and sets the stage for additional gains. The risk is that the correction become disorderly and caps the market's performance through the second half of the year and possibly beyond.
With key market areas like industrial stocks, as represented by the Industrials SPDR (XLI) at risk of violating support lines that have held since 2012, the risk of the latter materializing is increasing.
That's especially so because all of this is coming in the context of what's been a strong second-quarter earnings season, suggesting that either investors aren't responding to corporate profitability or they don't view the current pace of earnings growth (bolstered by share buybacks funded by cheap debt) as sustainable.
All things considered, with so many of the assumptions that have pushed stocks higher now under threat, the selling looks set to continue.
