There are concerns about the regulatory environment in China. We also have rising energy prices and fears of an energy crisis, as we mentioned last week. There is an ongoing debate about whether inflation is temporary or whether it will last a while. And can central banks start scaling back their bond-buying programs without sending shock waves through the equity and bond markets?
In this post we looked at what a taper tantrum is and what is QE (quantitative easing).
All in all, buy-the-dippers were right on schedule, pushing the markets up around 3.5% from the week’s low (for US stocks). Canadian stocks similarly rebounded, led by energy stocks that were in crisis for the month.
Given the inflated valuations for the US stock market, I think a real correction is healthy. But this real correction seems illusory. But margin calls would drive a stock market correction into a reasonable range. Let me explain: leverage (borrowing for investment) is at an outrageous level. Corrections in asset prices are often accelerated by margin calls. Then the broker gets nervous about an upcoming correction and sends you a message letting you know it is time to pay. Investors often have to sell assets to pay the bill. This increased sales can put further pressure on the markets and generate more margin calls. It becomes a vicious circle, a downward price spiral.
I asked Lance Roberts (no relationship), chief strategist at RIA Advisors, at what level of correction we would normally start the margin call cascade. Roberts said this is happening at the 20% pullback level.
While we may not be able to time the markets, this may be the right time to remind you to stick to your rebalancing plan: trim the stocks and other assets that are being propelled to new highs to meet your allocation goals in To keep check. And of course, keep all capital gains and tax issues in mind.
If we hit that 20% correction level and then a margin call event occurs, be ready to go the other way. You may be given the option to buy at margin sale prices.
Fed Policy Meeting Report: Loudest voice speaks softly
The Federal Reserve was not expected to announce a major policy change at the end of its Wednesday, September 22nd session. And Fed chairman Jay Powell did not disappoint when he was given the opportunity to say nothing. Of course, there is no rate hike, nor is there a date or clarity as to when they might start curbing their bond purchases. These bond purchases help lower interest rates and the overall cost of borrowing.