The regulatory environment in China is cause for concern. In addition, we have soaring energy prices and fears of an energy crisis, as we mentioned last week. There is the ongoing debate as to whether inflation is transient or persistent for some time. And can central banks begin to scale back their bond buying programs without sending shock waves through the stock and bond markets?
In this article, we have addressed the question of what is a taper tantrum and what is QE (quantitative easing)?
All said and done, âbuying the dipâ went as expected, pushing markets up about 3.5% from the week’s low (for US stocks). Canadian equities rebounded similarly, led by energy stocks which are in tears for the month.
Given the excessive valuations of the US stock market, I think a real correction would be beneficial. But this real correction seems illusory. But margin calls would cause a market correction in significant territory. Let me explain: the leverage effect (borrowing to invest) is at scandalous levels. Corrections to any asset price are often accelerated by margin calls. This is when the broker gets nervous about an impending correction and sends you a note telling you it’s time to pay. Investors often have to sell assets to foot the bill. This increased sales can put additional downward pressure on the markets and lead to more margin calls. It becomes a vicious circle, a downward price spiral.
I asked Lance Roberts (no relation), chief strategist at RIA Advisors, at what level of correction we would normally see the cascade of margin calls begin. Roberts said this is happening at the 20% withdrawal level.
While we can’t time the markets, this might be a good time to remind you to stick to your rebalancing schedule: cut stocks and other assets that are being pushed to new highs to keep your allocation goals under. control. And, of course, keep capital gains and tax issues in mind.
If we hit that 20% correction level and then experience a margin call event, be prepared to go the other way. You might have the option of buying at selling prices on margin.
Fed Policy Meeting Report: Loudest Voice Speaks Softly
The US Federal Reserve was not to announce any major policy change after its meeting on Wednesday, September 22. And Jay Powell, Chairman of the Federal Reserve, did not disappoint when given the opportunity to say nothing. Of course, there is no rate hike, nor a date or clarity on when they could start cutting their bond purchases. These bond purchases help reduce overall borrowing rates and costs.