(New York)

Advisors all over the country got a lot of worried phone calls yesterday. Clients are understandably anxious about the mammoth losses over the last week, all punctuated by an almost 5% fall in the Dow yesterday. One advisor from LA says that “We’re reminding them that we knew this was going to happen and that we’ve been planning for it”. Other advisors are reminding their clients that the economy looks strong and that we are not headed into a recession. One Wells Fargo advisor makes a note that looks negative for stocks, saying “A 10-year Treasury yield above 3% would be reasonable competition for equities, and I would be able to replace fixed income maturities with higher yields for the first time in a decade”.

FINSUM: We think this a healthy correction, but that the market will likely continue to move higher. There is nothing fundamentally wrong with the economy, and once the market realizes that higher rates won’t kill stocks, things will get back to normal. However, this maelstrom is a very healthy recognition of risk.

(New York)

Everyone knows it, but in case you were under a rock, the Dow had its worst day in six years yesterday. At one point the index fell around 1,600 points before recovering to close down 1,175 points, or nearly 5%. The S&P 500 fell 4.1% to close down 7.8% since last Monday. One commentator argues that the market is now in “full price discovery mode”, with no technical supports or trend lines holding whatsoever.

FINSUM: We are five years since the Taper Tantrum, and now it is actually happening. Is this the start of the huge sting everyone has been predicting for years?

(New York)

The markets had a wild day yesterday. Big loss at open, almost back to even, then a really steep fall, and finally, a little rally to close. Bloomberg says that the trading activity has all the telltale signs of algorithms wreaking havoc. For 15 minutes just after 3 pm, the volume of sell orders was so quick and so voluminous that nothing alive could have possibly executed them. The market tanked, plunging to a 1,597-point loss. Interestingly, the involvement of algorithms might help to assuage some fears, as brokers are using that dimension as a way to calm human investors that this was not an all out emotional panic, but rather technology gone wild.

FINSUM: So we know they are deeply ingrained and certainly going nowhere, but why, in principle, are non-human agents allowed to transact in markets? Market-making firms would say they add liquidity, but they certainly exacerbate, or even cause panic too.

(New York)

One of the guiding ideologies of the bond market over the last few years has been to buy the dips. Every time that bond yields have risen some, it has been smart to go long bonds as they inevitably came back down. However, this time looks very different. The difference is that central banks are no longer fixed to their ultra-low rates policy, which means there is no big magnet that pulls rates and yields ever downward.

FINSUM: So in our view what is really happening right now is a market wide price discovery period for bonds. Because the underlying situation is changing, no one is comfortable judging bond yields and prices. This worry has spread to equities, but in our view the root anxiety is in fixed income.

(Washington)

The midterm elections are currently dominated by two incompatible assumptions. Democrats think Trump’s low approval rating and the rash of Republican congressional retirements will lead to a big string of victories for their party. Republicans hope that growing economic confidence, underpinned by the White House’s policies, will win out. The big X-factor is now the stock market, which has been gutted over the last few days, a fact which could rattle the economic confidence of Americans. Democrats need 24 seats in the House to take back a majority. Many suspect they will win 30.

FINSUM: Trump and the Republican party are up against history (the party of the President typically does poorly in midterms), and now possibly the markets and economy.

(New York)

While all the focus is understandably on stocks, Bitcoin is continuing to see a huge exodus of buyers. The market is now down to around $6,000, or about 70% from its peak of near $20,000. Bitcoin, and crypt currencies generally, have been brutalized by a number of regulatory announcements which seek to reign in the currencies. These include in South Korea—one of cryptocurrencies’ biggest markets, as well as by the SEC in the US, where chairman Jay Clayton has become a staunch enforcer.

FINSUM: We have been saying for months that there was simply too much regulatory risk to sustain the high valuations. That prediction has certainly proved right and we think it has further to run.

(New York)

We appear to be in the middle of a long-absent bout of volatility for both stocks and bonds. After a year of almost no volatility, all the major US indices fell strongly last week. The market is also off to a rocky start today. Now, Barron’s is arguing that this could be the beginning of an ugly ride. The reason why is that the recent trend of stocks and bonds being negatively correlated is ending. While for many years bond prices would rise when stocks fell, and vice versa, the opposite is happening now. Because the market fears rate hikes, bonds and stocks are falling in unison, with nothing to give the market comfort. For that reason, the “bond cushion” that has protected markets since the Crisis, appears to be gone.

FINSUM: The whole paradigm of markets is changing right now. Stock investors cannot simply flee into Treasuries as they have for years, which means there is little place a hide—a fact which could bring more serious losses.

(New York)

So we are a year into the presidency of one of the country’s biggest real estate developers. However, the reality is that a lot of uncertainty looms over the housing market. Between rising rates and the new less-interest-friendly tax package, the market is facing some headwinds. But analysts say that the biggest driver right now is that the uncertainty around the tax package is finally in the rearview mirror, which is allowing deals to go through which were previously on hold.

FINSUM: Our view is that the top end of the market, say $1m+ homes, are going to struggle a bit for a few years. The reasons why being the new limited mortgage interest deductions rules, and the fact that the Millennial generation, which will drive home buying, are not very wealthy yet.

(New York)

Okay, so there is a lot to be gloomy about with the stock market right now. Stocks had a terrible run last week and are off to a poor start today. However, looking in the longer-term, there is some heartening news. That news is that despite some forecasters saying the demographic backdrop for stocks looks weak as Baby Boomers begin to withdraw money as they retire, all that slack, and perhaps more will be taken up by the Millennial generation, which is the largest in the US.

FINSUM: Here is an additional argument we found interesting—that compared to market history, stock returns for the period from 2000 to 2016 were very weak on a relative basis. Coupled with the demographics, it makes one think there may some long-term potential left for this market.

(New York)

For years the big fear across the wealth management industry was that robo advisors would steal clients for human advisors and eventually leave the latter jobless. However, several years of evidence shows that is not actually what is happening. First of all, it is not Millennials which are the biggest consumers of robo services, rather it is baby boomers. For instance, Vanguard reports that 85% of those enrolled in its robo are over the age of 50. Even at Merrill’s Edge platform, the percentage is 45%. Additionally, the ~$200 bn that has been brought under management by robos does not seem to have migrated out of human-advised accounts, but rather is new money coming into the industry, representing pure growth.

FINSUM: While the threat of robos has been lessening over the last couple of years, this is downright positive news. Rather than eating away at human advisors, robos seem likely to actually bring more capital to the table.