The market is back in the headlines for all the wrong reasons. The S&P 500 broke below its February lows this week and the damage just got worse. Panics like these occur from time to time. Remember 2011, when the markets fell 20% as the Euro debt crisis spun out of control and the US debt was downgraded. It was ugly for awhile, but the storm passed and the markets continued higher. This storm will pass too.

Generally, I don’t like to speculate on the causes of these panics. Investors should be worried about whats within their own control (assessing goals, time horizon, and risk tolerance). But I think this all begins with trade/tariffs and the disruptions to global supply chains along with the uncertainties they cause. The US economy is on solid footing (as we noted here), but the rest of the world isn’t. S&P 500 companies generate 40% of their revenues overseas, so sustainable global growth is important. Global growth is expected to slow in 2019, but slower growth isn’t a recession. Post financial crisis the markets have done just fine with a 2% growth economy. 2018 was a banner year for earnings and economic growth, setting the bar high for 2019 comps. What’s different this time is a growth slowdown along with a hawkish Fed. (I personally don’t believe its too hawkish because even if the Fed hikes rates twice next year, a 1% real Fed funds rate really shouldn’t put an end to this expansion. But the bond market is signaling some concern. )

Which brings me to my next point…

Fed Chairman Powell told us this week that the Fed is no longer going to placate to the markets temper tantrums. Since the financial crisis the Fed has gone out of its way to appease markets whenever they reacted badly. From unprecedented monetary stimulus (ZIRP & QE), to “Taper Tantrum”, to Yellen putting the brakes on further rate hikes in 2016. This “silent agreement” could have led to complacency among market participants, especially during an era of zero interest rate policy. The removal of the “Fed put” is something the markets are going to have to adjust to. Fed President Williams tried to appease markets on Friday, but it didn’t work. It’s going to have to come from Powell himself, and I have a feeling he will backtrack if the damage continues. But for now, the markets are trying to price in the new reality.

Add in politics, Brexit, and ECB removing stimulus at a time when they may need it most, and you have a wall of worry that the market just couldn’t continue to climb indefinitely.

The S&P 500 rally off the 2016 lows matched the size of the 2011-2015 rally. Perhaps the market had gotten overbought, but hindsight is always 20/20.

The market reached a potential support zone between 2405-2018 during Friday’s sell off. If this fails, we have one more around 2322, which would match the size of the 2011 sell off. If we can hold either of those first two support levels, I believe the bull market is intact and a rally to 3600+ will be underway. Failure could bring us back to 2195 and 2135, which would erase the entire Trump rally. Momentum is clearly to the downside, we can’t completely rule it out.

Time will tell. Hopefully 2019 will be much kinder!