As I’ve written before, stability in the economy, and in the financial markets, breeds instability. That screenplay has been used over and over again throughout history. We might say that one specific event changed everything, but that was just the match, the barrel of gas was already there, ready to burn.

2017 was the year of stability, or as others may put it, the year of complacency. In 2018, we saw the talking heads blaming the Fed for hiking interest rates and causing a downswing in markets and sudden cooling in economic indicators. In the present year, the trade war took the blame for May’s downswing. Then, the Fed saved everyone at June’s meeting. I see that pattern going on for some time into the future. The 10-month price action for the S&P 500 is all about instability.

Graph 1 – S&P 500 10-month price action

More than a confusing narrative, I think we are dealing with an acceleration of the instability. Consensus build up very rapidly, either on the upside, or the downside, and then, they fall apart just as fast. The main concern is that these recovery moves are way too fast to be a good reflection of what is happening in real life.

The truth was here all along. Donald Trump’s election was explicitly based on the idea of having a trade war with China. However, folks decided to ignore that part and just look at the fiscal reform. After it became evident that there would be a trade war, they thought that China would fold pretty soon.

The tough reality is that the trade debacle will be disruptive, for the US economy, as for China. And the current market moves, following an uneventful trade deal with Mexico, are already more than discounting a hypothetical recovery. In other words, the current environment, in financial markets, is detached from reality.

Therefore, I expect seeing an acceleration of these ups and downs. As we have seen, every time the market gets close to all-time highs, the President escalates tensions on some front. The trade war escalated, in May, after the market was at its highest point for the year. The the Fed rescued the stock market. That pattern has become all pretty obvious, and, therefore, we should expect a regime change in the following months.

What will cause it, I do not know. But, I do know that the present regime can’t go on forever because it is utterly unstable. However, that doesn’t mean that, during the following months, the current dovish tone, coming from the Fed, won’t prop-up stocks. Maybe it will even get the stock market into all-time highs. The market still exhibits enough strength to rally significantly. As consensus are formed very rapidly, and then they are self-validating, we might still watch a bubble develop on top of the current one. Maybe it will even get the stock market into all-time highs. The market still exhibits enough strength to rally significantly. As consensus are formed very rapidly, and then they are self-validating, we might still watch a bubble develop on top of the current one.