Why the market sell-off just keeps going


While worries about rising rates and a tightening Fed are very real, they come at a time when the economy is moving along at a nice clip, earnings are nothing short of superb and Washington, for all its political chaos, remains firmly pro-business.

Still, one of the oldest market truisms is that buying begets buying and selling begets selling. So when the doors are suddenly flung open on a market that has been on such a breathtaking tear higher, it’s only natural that many participants will follow the crowd outside looking to get a breath of fresh air.

Dubravko Lakos-Bujas, head of U.S. equity strategy at J.P. Morgan Chase, took note of both the usual and unusual suspects, and noted how the current market action suggests that market psychology rather than the usual sell-off suspects is taking hold:

We see the market selloff entirely disconnected from fundamentals. While the sharp rise in volatility may contribute to further outflows from systematic strategies in the short-term, we believe fundamentals should ultimately prevail as companies continue to deliver double-digit earnings growth on US tax catalyst, global synchronized growth, and weaker [dollar]. Also, we expect a ramp-up in shareholder return to provide support for equity prices.

Indeed, Lakos-Bujas is just one of multiple Wall Street strategists telling clients that this dip is very buyable as valuations suddenly have gotten at least closer to historical norms and the rest of the backdrop remains supportive.

Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, pointed out that in the post-financial crisis era, big market dips have almost always served as solid opportunities to put together a list and go shopping.

She noted that a “pullback may have been overdue” because “nervousness had been building for the past few weeks.”

While the sharp decline in the S&P 500 on Monday was unnerving, it is important to keep in mind that these kinds of moves have tended to be buying opportunities in the post Financial Crisis era. By our count, the S&P 500 has experienced one-day drops of 3% or more 15 times since 2010. These drops have often occurred in the context of choppy equity market conditions in the short term. But six months later, the index has been meaningfully higher the vast majority of the time, with a median gain of 12%.

Still high on the list of the usual suspects, however, is the Fed.

The central bank is watching inflation developments closely. Investors worry that if wage pressures heat up and prices follow, that would push the central bank into tightening policy and choke off the main market story of the past nine years, namely cheap money and easy financial conditions that have allowed the massive market run-up.

The Fed ended its money-printing programs in 2014 and last October started gradually shrinking its balance sheet. Yet for all the talk of tightening, the $4.2 trillion portion of the Fed’s bond portfolio that consists of Treasurys and mortgage-backed securities has declined just $15.6 billion since October.

Boockvar, though, said the Fed’s “credibility as perpetual bubble blowers is now about to be tested again.”

WATCH: Despite the big drop, no evidence of panic selling.

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