Judging from Friday's morning trading, momentum may be shifting on Wall Street. At 10:30 a.m. stocks were sharply lower, with Dow losing 0.85 percent, S&P 500 losing 0.93 percent, and NASDAQ 1.11 percent. Treasuries and precious metals moved in the other direction. iShares Barclays 20+ Year Treasury Bond Fund (TLT) was up 0.96 percent;Gold ETFs like SPDR Gold Shares (GLD) up 0.57 percent; silver ETFs like ISHARES SILVER TRUST (SLV) up 0.86 percent.
For more than three years, Wall Street has had everything going its way:
- An ever accommodating Fed, pushing almost every major interest rate near zero -- in essence, providing free money to Wall Street to chase after every asset category.
- A falling dollar, cushioning economic growth and helping major exports recover nicely from the 2009-lows.
- A reputation as the world's safe haven, as the rest of the world -- most notably Europe - went off the fiscal cliff.
- An ever-accommodating Washington, renewing the 2001 Bush fiscal package, even as the economy recovered.
All these tailwinds created a sense of complacency among traders and investors, a win-win mentality reflected in two scenarios:
Scenario 1: Fed accommodation and fiscal easing will eventually help the economy grow-good scenario for Wall Street.
Scenario 2: The economy deteriorates; Fed accommodation and fiscal easing continues-good for Wall Street.
The trouble with these scenarios is three-fold.
First, as the Fed drives interest rates near zero, it eliminates an important signal of the market system that helps investors allocate funds efficiently and effectively, fueling bubbles that will eventually come to haunt Wall Street, as was the case in 2008-9 crash-preceded by Greenspan's "put."
Second, fiscal easing works miracles when it begins from low debt-to-GDP ratios, as was the case in the 1980s. But it can be disastrous when the trigger points are reached, as was the case in Greece, Spain, Portugal and Ireland. That's why Wall Street has become so sensitive to political deliberations over fiscal policy in Washington.
Third, while America has continued its fiscal easing path, European countries have been getting their house in order, prompting credit agencies like S&P to upgrade Greek debt.
This means that capital may begin to flow back from U.S. to Europe, fueling a rally there-Greek equities almost doubled since last year.
The bottom line: Wall Street's tailwinds may be about to turn to headwinds, fueling a momentum shift, from complacency to fear. Investors should be very careful in committing new money to the market at this point.