Stocks have been having a wild ride this month, kicked off by a steep sell-off in early February. While the markets have recouped a lot of the losses, TD Ameritrade‘s JJ Kinahan is warning that it’s not over yet.
In a blog post, the chief market strategist at TD Ameritrade Holding Corporation (AMTD) said that, while the fundamentals that have been driving the economy haven’t changed this month, perceptions have. That in and of itself could create more volatility for stocks, even if most observers on Wall Street don’t expect a recession in the near future. What’s more, Kinahan said that the spread between the two-year and ten-year Treasuries has stabilized after tightening a bit. That spread is used as a gauge to determine if a recession is looming. Meanwhile, last week, the S&P 500 Index had its best week in more than five years, and the Dow Jones Industrial Average surpassed 25,000 again.
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Despite all that good news, the markets can easily get spooked, as was evident in late-afternoon trading Wednesday, setting the stage for more volatility to come. The Federal Reserve released the minutes of its meeting Wednesday, signaling that it is sticking with its stance to gradually raise interest rates this year. That drove the Dow Jones Industrial Average and other major indices higher, only to see them reverse course after investors digested the minutes.
“After being up over 300 points, the Dow Jones Industrial Average ($DJI) finished down 167. The CBOE Volatility Index (VIX), which began the day around 20 – well below the recent highs of 50.3 on Feb. 6, in the heat of the recent meltdown but still elevated from last year – fell to below 17, a roughly 15% move downward, before finishing the day back above 20,” wrote the chief market strategist at the Omaha, Nebraska-based discount brokerage. “Perhaps many were expecting a bit more ‘dovish’ talk from the Fed. Recall at its January meeting, rates were left unchanged, but many interpreted the statement as a veiled warning about inflation.”
According to Kinahan, the Fed could extend the interest rate hikes into 2019. He said that the markets appear to be pricing in inflation, although investors need to remember that inflation has been low for many years and currently remains at low levels in the U.S. and in other developed countries around the world. “The bottom line for traders and investors, though, is that the wild ride may be far from over. Stay tuned,” wrote Kinahan.
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