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As widely expected the Fed increased the overnight rate by 0.25%.  The Committee also lowered its projections for 2019 to two increases versus three.  Consensus was between one and three rises for 2019.  The FOMC stated “economic activity has been rising at a strong rate” and risks to their outlook “are roughly balanced.”

The Federal Reserve flagged threats from a softening world economy stating “we will continue to monitor global economic and financial developments and assess their implications for the economic outlook.”  The vote was unanimous.

Volatility rose sharply following the announcement rising and falling by over 200 points in a five minute period.

As noted yesterday, anxiety is rising about recent volatility.  There have been record hedge fund liquidations, retail selling of ETFs, institutional selling of equities, all in the face of no liquidity, the result of market mechanics and regulatory pressure focusing upon cost and speed of execution versus liquidity and capitalization.  The only buyers are stock repurchase plans, plans that are generally restrictive in nature and are not an effective market stabilization mechanism.

Recent data suggests 80% of equity trading is the result of algorithmic trading which at times exit the markets in times of volatility thus creating a liquidity vacuum.  Five years ago this was an obscure part of equity trading.  Today it is dominating with little oversight.

Returning back to yesterday’s market action, selling accelerated after a brief lull. At one juncture, all major indices were down over 2% under the guise the Committee was not as dovish as anticipated.  The Dow ended lower by 1.5% but selling continued in the NASDAQ ending 2.25% lower.

In my view there are sectors that have been completely obliterated falling below replacement value.  Conditions will change but will a crisis first have to occur.  For example, a failure of ETF sponsor or technology based trading firm, the result of this intense volatility.

What will happen today?

Last night the foreign markets were down.  London was down 0.37%, Paris down 1.49% and Frankfurt down1.0%.  China was down 0.52%, Japan down 2.84% and Hang Sang down 0.94%

The Dow should open nervously flat.  Reflecting upon yesterday’s Fed action, in some regards it gave the proverbial “all clear sign” but in other regards the Fed has completely misjudged the situation.  Rarely is there a dichotomy, an either or environment.  I continue to contend the economy is strong and will remain “robust” for the foreseeable future, a view that is similar to the FOMC.

The 10-year is off 4/32 to yield 2.71%.


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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.