Friday's Market Minute: Liquidity Concerns Take Center Stage

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Equity indices are headed for their sixth straight weekly fall in a row, and the mounting losses are causing investors to sour on the market. It is hard for people to care about valuations when stocks are rising, yet our psyches don't allow us to easily sell into strength and avoid buying every dip thinking the selling has ended. With all major indices down so far this week, concerns over liquidity are circulating across financial channels.

Liquidity drives money flows into and out of markets. Just as easy liquidity and low interest rates found their way into stock prices since the Great Recession, sudden high interest rates have worn down equity longs this year. While the narratives have been about interest rates, that risk has largely been priced in. We can see it in the flattening yield curves. As the Fed tightens liquidity through rising rates, this impacts mortgages, business and household borrowing, and an overall profit squeeze simply due to the higher cost of doing business.

Despite the S&P flirting with the conventional 20%-off-the-high definition of a bear market, mega-cap tech giants like Apple and energy have been holding relatively strong. Now, cracks in the ice have appeared. The breadth of the market may be temporarily shifting back in favor of the bulls as Apple and Microsoft traded lower yesterday along with the volatility index while the Russell 2000 closed in the green.

Some traders on Wall Street believe that a stock market bottom is nearing, but confidence in that call is not quite that high. Profound countertrend rallies are to be expected in short order, but perhaps once all the mega-caps come down in price 20%-30% then the bear market may largely be over, as most of the damage will have been done.

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This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.