It's up, it's down, it's done: a day in the year of the Dow

The last full trading day of 2018 closed in a way that suited the year: up, down, up harder, down harder, done. The Dow finished a few points under flat, which conceals what happened. This page kept the day because the size of the moves, and the way they ended, said something about the market’s dependence on support that the closing number did not.

The day

The market was quiet until two in the afternoon. Then, in the words of Zero Hedge’s account, the Dow “blasted higher, supported by a burst of massive buy programs”. The NYSE TICK, which counts stocks upticking against downticking in a moment, printed the highest reading in its history at 2:39 pm, with upticks exceeding downticks by 1,775, and three prints above 1,650 inside ten minutes. Readings above 1,000 are considered extreme in either direction. Two days earlier, on 26 December, the fourth-largest buy order on record had helped send the Dow up 1,086 points, the largest one-day point gain in its history, after the worst Christmas Eve ever. On the 28th, after the record buying, the index fell about 225 points in the final hour and closed below where it started.

Pensions or plunge protection

Two explanations were on offer. The first was end-of-year rebalancing by pension funds, which sell bonds and buy stocks in December when stocks have fallen and their allocations have drifted. That fitted the 26th, when stock prices and bond yields moved together as rebalancing implies. It fitted the 28th less well: three record buy programmes in ten minutes look like one very large buyer, and the money that left stocks in the final hour went into bonds, which is a flight to safety, not a rebalancing.

The second explanation was the Working Group on Financial Markets, the so-called plunge protection team, whose existence is a matter of record and whose activity is not. This page was candid that this was a guess. The group does not disclose what it does, and anyone claiming to know is claiming too much. What could be said was that the buying on the 28th did not fit the ordinary pattern, and that whoever it was, it did not hold.

The paradigm shift

That was the point. For nine years, every large push into the market, by the Fed’s purchases or by whoever bought the dips, had held. On 28 December 2018 the largest push ever recorded did not. The law of diminishing returns, invoked here through the whole year, was operating: each intervention buys less than the last, and eventually one buys nothing. The Fed had raised rates for the fourth time that year on 19 December, said its balance-sheet reduction was on autopilot, and watched the market fall 8 per cent in the following four sessions. Even if it reversed, the argument ran, the demonstration that it could not unwind its balance sheet without breaking its own recovery would make every future round of easing less effective, because the end game everyone had asked about for years now had a visible answer.

What investors said

The trade press quoted investors fearing a “wicked bear trap” after the historic rebound, and describing two weeks of “disturbing moves”. CNBC listed the causes as wild swings, a government shutdown and Fed fears. The last was the one that mattered.

Later note. The Fed reversed within a week. On 4 January 2019 its chair said it would be “patient” and flexible on its balance sheet; the market rose 3.4 per cent that day and 29 per cent for the year. The pivot bought a great deal, which was the opposite of what this page expected. What it cost was the Fed’s stated intention to normalise, which was abandoned and has not been recovered; the “autopilot” balance-sheet reduction ended in 2019 with the balance sheet nearly four trillion dollars, and by 2022 it was nine.