“Franco Cozzo Grand Sale, Grand Sale, Grand Sale. Where? In Brunswick and Foot(a)scray”. Being a Melbournian, how can you forget these iconic words? The penniless Italian / Greek migrant, Franco Cozzo, who turned his little furniture shop into furniture giant will long be remembered for his memorable words. Which is the reason why, in true Franco Cozzo style, we think the share market is a Grand Sale. “Megalo, Megalo, Megalo”. That’s right people. Stocks on both the Australian and US markets have endured a sharp correction combined with high volatility and indiscriminate selling. We’re putting our contrarian hat on today and we think now is the time to load up your shopping basket and grab some bargains. 2 Feb – Dow Jones fell 665 points (-2.54%) 5 Feb – Dow Jones fell 1175 points (-4.60%) – Biggest drop in history 6 Feb -Dow Jones gained 567 points (+2.2%) 7 Feb – Dow flat. 8 Feb – Dow Jones falls 1033 points (-4.15%) – Second biggest drop in history 9 Feb – Dow gained 331 (+1.38%) So far – Dow Jones is down 1996 points (-7.6%)   The Dow Jones and S&P 500 have entered correction territory for the first time in two years all sparked by the Fear of Rising Rates (we calling it FORR). The market hasn’t had a correction of about 10% since February 2016. In last week’s article “Yibbida Yibbida that’s all folks” we discussed the reason for the sell-off. After digging deep, we’re almost entirely confident that this sell-off is nothing to be concerned about. Come again? This sell-off is merely a rinse out. The market was overcooked and frothy. The last time the US market has fallen by 5% was June 2016, weeks before President Trump locked up the GOP nomination. The red-hot stock market has soared nearly 40%  after Trump’s surprise victory. In other words, the market has been doing so good, it’s gotten a little ahead of itself, and needed a reality check. And the trigger was inflation. A stronger than expected job/wages report pushed inflation expectations higher and that of course means higher interest rates. That’s really what caused the fall on the Dow last Friday night. Shares came under pressure because the Fed’s rate hike expectations had increased, reflecting higher wages and bond yields. And initial losses were exacerbated by quant and algorithmic traders. Computer programed traders and institutions executed large sale orders and dumped their positions. Some algo traders and front runners jumped ahead and sold their positions as well. They then bought back on the recovery. This is what caused the ‘flash crash’. Here’s an interesting fact. According to analysis done by CNBC, they’ve been six periods where major rises in interest rates have occurred in the last three decades. The market rose by a significant amount five of those instances and only fell slightly during the one lagging period. The S&P 500 rallied 23% on average in the time periods. Those odds look pretty good. Think about it. A tightening labour market and a pickup in wage growth will help boost inflation. As inflation increases, wage growth also rises as the two are correlated. And that is welcoming news for the…

To continue reading...

CLICK HERE NOW

Blurred Text