​Why stocks got slammed (but should soar again)

European tremors hit U.S.

Markets were under heavy selling pressure on Friday, with the major U.S. equity averages slicing below their 50-day moving averages with all the grace and finesse of a pig trying to fly.

There was no single factor for the decline; rather, a combination of factors, both in the U.S. and abroad, combined into a toxic brew. The Dow Jones industrial average dropped nearly 280 points to finish with a loss of 1.5 percent, dropping through the 18,000 level to close at just over 17,826.

The good news is that this should prove to be a temporary hang up, with stocks likely to rise in the months to come.

The pressure on markets started in Asia as Chinese securities regulators moved to lean against rampant market speculation by unveiling a ban on margin borrowing for certain stocks and allowing the increased use of short-selling. That hit Chinese equity futures hard, pushing them down nearly 7 percent at one point for the second-largest drop in seven years.

The troubles continued into the European session where fears are growing over the specter of a Greek debt default next month, when payments of nearly $1 billion come due to the International Monetary Fund. That pushed German government bond yields down into near negative territory. As a result, Germany's DAX average suffered its worst decline in four months.

Stocks plunge in massive Wall Street sell-off

And as New York was preparing to open, the Bloomberg financial terminal network suffered an outage that greatly reduced market liquidity, as institutional traders weren't able to see price quotes or place trades. The United Kingdom even pulled a debt buy-back because of the blackout.

Traders were also concerned by the slight uptick in consumer price inflation, with the Consumer Price Index (excluding volatile food and energy costs) rising to a 1.8 percent annual rate, since that could push the Federal Reserve to hikes rates sooner rather than later. That rate of inflation remains below the Fed's 2 percent target, but movement toward that objective has reawakened some angst that the era of ultra-cheap money could soon come to an end.

Adding to the general sense of nervousness and thinness on the tape is that it was expiration day for April options contracts.

All this comes just two days after the NYSE Composite Index broke above technical resistance that had held stocks in a sideways channel since last July thanks, in large part, to newly dovish commentary from Federal Reserve officials concerning the timing of rate liftoff.

For now, this thesis seems intact.

Societe Generale economist Aneta Markowska believes a June rate hike from the Fed is now off the table, moving the focus to September. Her reasoning is that while inflation is stabilizing and the job market remains robust (despite a soft March payroll report) the Fed will wait to see a clear rebound in U.S. economic growth after a severe winter before acting.

Currently, the Atlanta Fed's GDPNow real-time estimate of first-quarter growth is tracking at just 0.1 percent, down from a high of 2.3 percent back in the middle of February. As Markowska shows in the chart above, she believes much of the slowdown is weather-related. Growth is expected to re-accelerate strongly later this year.

Another factor to watch for, should the Fed delay its first rate hike, will be any resulting profit-taking in the dollar. Part of the reason stocks were inching higher into Friday's wipeout was the slight pullback in the greenback from its early March highs. That relieved the pressure on commodity prices and lessened the drag on corporate earnings from currency effects, a theme that will once again be a focus as the first-quarter reporting season continues next week.

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